Gene Inger's Daily Briefing . . . for Monday August 23, 2010:

Macro economics remain dire . . . irrespective of the market’s partial late comeback on a nominal Expiration Friday churn. That the ‘battle lines’ technically increasingly to us are drawn; there is little doubt that ‘bottom fishers’ (read desperate institutions and of course they are tied indirectly to the governmental efforts to provide some recovery illusions via the delusion of comparatively stable stocks, which nevertheless erode by a considerable degree when you look back to our ‘conditional warning’ back in April), as they try to sustain the market just shy of what could be a more crucial breakdown. Most believe this is a reflection of underlying ‘strength’; we see it as (for members).

This may be a good place to recall the observations about a ‘prize-fight’, where bulls are bounced off-the-ropes a few times (last and lower supports before potential free-falls or something nearly like that) just as the bears were successful in denying bulls a breakout over the 1100 resistance area just days ago. As and if (and we expect it as the days and weeks proceed) the S&P 1150 area comes out (perhaps a bounce from that area before it’s sliced-through), that will be a TKO for the bears; in essence a ‘technical knockout’. Even some well-known bears are trying to become a bit more optimistic; but I see that as a premature interpretation given (factors we’ve outlined).

(Some discussion is provided about the expected inaction over Iran; the nevertheless not negated risk of regional conflict over there, fostered by 4 Arab armies plus Iran’s on the alert for inexplicable reasons superficially. Then there’s looming tax changes.)

None of this negates the overriding domestic and global economic issues; just realize that with this market almost entirely dominated by High Frequency Traders, there is a tiny segment that will respond emotionally, and that’s why you have some hesitancies to capitulate, even when the market gets to levels where that seems logical based on a series of fundamentals (or technicals) that we’ve previously outlined. Nevertheless the market remains ‘heavy’ or tends to fade late in most days; itself a negative omen going forward, as is the so-called ‘Hindenberg Omen’, again said to be re-confirmed. (And we don’t pin analysis on any system or ‘omen’; but have expected downside in a series of reluctant phases with alternating rallies, really ever since April’s warning. Since then; most financial, oil and technology stocks are selling at ever-lower prices.)

Daily action . . . will be addressed in the two videos (the second provided primarily in that it reviews different time parameters as provided irrespective of daily outlooks for movements to initially estimated levels below current prices after this ‘firefight’ ends).

A summary of the week’s highlights (a good if alternating trading week); then tonight 2 ‘technical corner’ videos which provide an overview of continuing ‘at-risk’ markets:

Logical resolutions . . . to what many thought were mere summer doldrum churning has essentially resolved several points we’ve made: 1) that the overall decline was in a continuation mode, briefly obscured by (factors noted to members); 2) that levels at or near S&P 1100 would be visited first; but then the so-called ‘support’ at S&P 1050 would loom in the not-too-distant future; and that 3) it was and remains ludicrous to debate (overriding factors), as this is all part of what we have outlined (unfortunately wish it were otherwise) as an ‘epic debacle’ for over the past 3 years. This is not merely a ‘new normal’ (though that applies for lifestyles for a large segment of the population); but actually weaker: a ‘controlled Depression’ as I’ve termed it all along. (The significance is that others see it only now; we warned not to be suckered-in at any point of the ‘epic’, aside periodic rebounds within the context of an overall bear.)

There are a few vibrant areas in the economy; but insufficient to justify multiples from a general basis (summarized for weekend brevity); and manufacturing’s a disaster as long evident. That, not so-called ‘bargains across the Board’, is at least a good part of why I believe that this is not (yet) a great ‘buy and hold’ sort of opportunity, and that we would first probe resistance, and then subsequently challenge all support points recently seen (both seen this week just past). It’s irrelevant whether you’ll see a bulk of stocks at higher levels in 5-10 years (agree you probably will; maybe considerably so); but at the same time as for the next upward phase, we’ve warned that we’re not primed for that as of yet. (Members know when we roughly anticipate that starting.)

It coincides that the ‘bond bubble’ isn’t necessarily primed to break either; at least not lots; though the story of China diversifying into South Korean (you read right; not their so-called pals in the North) paper, is indeed an interesting insight into their policies as well as strategies (not just implied, but gradually being implemented) contrasted to of course just blindly buying an ever-higher proportion of U.S. Treasuries. That is a risk to governments here; and ties-into the risk of the Fed being behind the curve relative to where rates really are. Also the Greek situation is deteriorating anew. Funny how it seems the financial media has skipped both of these important stories last week; no?

Many professionals (and we understand their need to support their ‘book’ and clients) are arguing that the disinterest on the part of investors makes the market a buy. That is too cynical and too normal, for the times that we are in. Perhaps the investors have it right, and instead of being too negative, what’s happening is even more negative. If one wants to consider contrary thinking, it might be that traders aren’t bearish enough at this point (we define this a bit for our members). Sure some companies (noted NY co.) may be in a comparative sweet spot, but even firms with growing earnings can decline while the Indexes they are in drop) are doing swell, but not because they employ Americans in a time when there are limited opportunities to exploit at home and certainly no broad recovery supported by wrongheaded governmental policies.

I think that those who think the markets can be ‘saved’ from further correction, by just eliminating the Federal tax hikes are delusionary too (though there would be ‘a’ rally), and that’s because that does nothing (even if it occurs) to the (noted) budgets that are so strained as to cause assessed valuations on property to not result in lower taxes in many cases (as we expanded upon in Thursday’s commentary on the issue).

As to liquidity; sentiment (so far) isn’t valid, as the reticence to commit capital makes a lot of sense. Thus it’s a bit snooty for anyone in the industry to presume that merely because there is sidelined cash-a-plenty, that’s somehow immediately translatable to a bullish outlook. Au contraire; the institutions dominate this market; and are in awful shape to put fresh money to work. Thus, an absence of bids allows further erosion.

Our thinking was that the S&P would revisit the upside then start to meander to the downside (ie: 1100 then 1050 eventually, and ultimately lower as is known to be our view). This needn’t all implode at once, but the risk of an ‘event’ (for members only).

If I were to explain that further, I’d simply say if we had broken out to the upside (not projections here aside the occasional pop-and-flop patterns previously seen) it would have in our view been unsuccessful and a sucker rally. If and as we break down from here it will not be a sucker decline. We thought Aug.’s preceding rallies were decent opportunities to position for ensuing new declines in late August and (further outline), or early phases, have already occurred, with a potential main-event still approaching.

(Bond and muni comment). With respect to equities; yes, we concur with those who see less risk in some sectors as contrasted to bonds at this point; however, we are not going to embrace ideas of venturing in further, until we see what extend of further risk crystallizes in terms of a decline, during this dangerous period that following the initiation of new ‘crash condition’ risks back in May (forewarned of in April); and of course rebounds of an oscillating style (equivalent to bouncing off the ropes noted; and particularly downside potential if certain criteria are realized, are outlined).

When pondering new stimulus and home ownership plans that are subsidized entirely on the backs of the population or future generations, consider this prescient quotable:

"The American Republic will endure, until politicians
realize they can bribe the people with their own money."

Resiliency . . . in the face of a few fairly favorable data points and yield-chasing, has not offset the prospects of a compression in equity valuations; in the bigger picture. It remains a slow growth environment (GDP annualized at 2% growth at best; likely 1% as they revise Q2 soon from the reported 2.7% gain); and this conjures-up thoughts it seems of ‘market neutrality’ (trading range) predominance for the next couple months or so. Do we believe that’s probable? Absolutely not, and you know the key reasons.

Most are concerned that sentiment is overly negative; where we ponder whether it’s a bit the opposite; perhaps insufficiently primed for meaningful further decline. This isn’t merely a question of headwinds ahead of 2011 and 2012; though that’s an issue; and it’s not because of a lack of an escape velocity for jobs (enough of a recovery to allow that to break free and climb); though that’s part of it. And it’s not because elections may unseat a number of congressional stalwarts (as got bamboozled in many cases into supporting the absurd structuring of the stimulus packages); though it’s part of it.

Rather the ‘fiscal wall’ ahead is what simply requires a re-pricing not only of risk; but of multiples to conform a little better to the growth-rate prospects of the era we’re in, and are likely to remain in for (time frame and discussion of tax cuts/hike follows).

Bottom line: omens or no omens; the market remains in a churning series of thrusts down and up, that likely results in a potential decline that could become vicious over the weeks ahead. Even in a couple of summers where markets eventually dropped a lot; there were preceding rallies that took the edge off the oversold markets; relieving things temporarily on the surface, but in reality preparing the market for the next drop.

Conclusion: stabilization efforts notwithstanding; overall recovery and deleveraging conditions will prevail (not may prevail) through this year, and probably into next year as well. Intervening market rallies do occur (some fairly wild), but of limited duration, at this point. If other developments unfold that could change prospects we’ll evaluate.

Bottom line: continuing characteristics; include (consolidated a bit) the following bullet points:

MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by markets; particularly as 2010 evolves (whether just as a correction of a worse case remains to be assessed). Remember back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first asset bubble to deflate. We then outlined structured investment vehicle failures; banking issues, the confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'. New sets of storm clouds quietly are gathered.

As the debt bubbles continue to deflate, alternating tradable moves continue from a trading perspective. Against that backdrop retaining a macro (adjusted) Sept. S&P 1600 +/- short irrespective of interim oscillations. Technical analysis via video follows.

Over 3 years ago I commenced projecting an 'accident waiting to happen'; affirmed historically after long-duration periods of free money (Gilded Age mentality). Now a market finished struggling with over-extended rebounds as our economy restructures.

Though enormous efforts have avoided systemic disaster on the banking front; there is no equivalent rescue of the overall economy besides perception; nor restoration of engines for sustainable growth. People are adjusting to lower expectations; which will never be a favored approach to American life. Actually we don’t see it as permanently alternating the future; but we still have major adjustments to work-through. That’s the reason I warned about chasing rallies; not to mention major ‘commercial’ adjustments as are ongoing. And as I’ve said; fairly visible new storm clouds were clustering.