Capping-off a solid rebound . . . was anticipated into and after Thanksgiving. At this point, virtually nothing has changed technically or fundamentally from that assessed it would appear over recent weeks; including monetary policy and the ‘hope’ quotient.

Of course the latter relates to an idea that the new Administration inspires optimism; as it well may (that’s an important contributor to helping people not become morose as regards the future). What optimism doesn’t do is automatically stoke finances for a family; nor a corporation. Now sure; we’ve already said that if business grows rapidly, of course many of the concerns about ‘solvency’ versus liquidity (which is overblown in terms of the macro aspects; or largely addressed for the Financial sector, which is not the same as making more money available for public lending) will vanish in time.

That there is a ‘return’ of governance is one of the rationales about this comeback by the market. However; in terms of finances, there is really ‘continuity’ more than return of governance at play. Internationally; the Iraqi war has been planned to unwind for at least the last year-plus; and that we think would have happened were the surge quite so successful or not (and we’re pleased it worked; assisted by simply putting Sunni’s back on the payroll, which was one of the key errors the former Defense Dept. made) as often mentioned; ie: you never fire the non-political core of an army or local police, just as Generals Patton and McArthur proved against Washington preferences at the end of World War II (given they stood their ground hiring German & Japanese locals).

Ironically, it may be the Obama Administration that is tougher on terrorism than often suspected. Both because necessity is the mother of invention, and as there’s no easy alternative when the enemy thinks they have a soft spot in which to attack the West (or conversely; they are desperate because America’s world-image is on the ascent).

The ‘politically correct’ use of the term ‘militant’ (disgusting when you here it used by media when referring to the barbarians wracking-havoc in Mumbai) should diminish to the correct term ‘Islamists’ or ‘Islamic terrorist’. Trained forces that amphibiously and stealthy disembark a tramp freighter and attack/invade a peaceful city or nation are not ‘militants’ (which should be a term reserved for local agitators), but terrorists. If they are indentified by uniforms and not covert they are invading soldiers or troops; mounting a surprise attack. In this case they were terrorists; not at all just ‘militants’.

(By the way; while little is known it makes sense that Talliban-al Queda would try to fan the historic tensions between India and Pakistan; to provoke hostilities and play the old animosities, so as to relief pressure on them since the Pakistani Army finally has been more responsive of late to the need to take action against tribal areas that are infested by the radical vermin. Hopefully India and Pakistan will work hard not to be drawn into becoming pawns of the organized terrorists groups if that’s what it is.)

Daily action . . . two weeks or so ago said we could not get a decent market rally this go-round, unless we had Oil participating; as Oil and Financials are usually the key. It was not that we didn’t expect Financials to rebound; given we did. Said we’d sure not press the short side; and that of course they were so pummeled you’d get rebounds. But in our view the oil (and even commodity based plays) were high probabilities than the Financials which were (and are) riskier, given the underlying fundamental issues.

Now; we don’t begrudge the reforms and changes that will turn the tide for housing in the future (way in the future), or quell some excess hysteria in the consumer sectors. The expected market rally of the past week-plus reflects relief of an excess negativity from a short-term perspective; and may or may not have intermediate ramifications. It is more likely that the pattern we’ve discussed with respect to up around the holiday; a follow-through in early December; then some retrenchment before we try again; is a reasonable expectation. Next week we’ll see more ‘color’ from initial retail shopping in the first big weekend; though my conclusion my vary from the typical. I’d think that we want to see consumers be very conservative; which would be a sign of maturity from a middle class that could be paying-off debts, rather than enhancing retailer fortunes. Mass buying ‘on credit’ isn’t getting bargains; just merely encumbers the populace. It might be ironic (and the market may not react accordingly, if it all) but the bullish case might be if the retailers do miserable, and people recognize the need to save anew. I it’s not a ‘bah-humbug’; but better future preparations, rather than feeding addictions.

A quick synopsis of the pre-holiday week’s missives; and then the weekend video:

Holiday monetary stuffing . . . intended to quell most bitter tastes from experiences, before the short-side gains were harvested (at least temporarily) with the rebound; do conceal some basics we’ve repeatedly tried to convey. The simplest explanation is to argue the Government’s supposed liquidity injections to buttress the ‘most solvent’ of the major banks and institutions. By denoting all along (since the Spring of 2007) that in reality, liquidity pressures requiring Government injections, are inevitably merely a reflection of, or the precursor for, technical insolvency or comparable challenges, will clearly summarize the risk. Regulators almost never reveal ‘true’ financial statements that would reflect insolvency based on the profligate structural lending, borrowing, or loans increasingly impaired. And while this holiday rebound was ‘stuffed in the bird’, so to speak, since last week’s Obama financial-team preceded by a flat bottoming of a fairly typical nature that day; there is little reason to suspect birds out of the woods.

That’s a reason why we not only projected, but take note tonight, of the ‘commercial loans’, which can be overall business loans on-top of commercial property paper; that increasingly are piling-onto the write-off’s, and we suspect suspected charge-off’s, or renegotiations, that have started to be faced in 2008, and will increase during 2009. It is likely right at the heart of ‘why’ commercial lending hasn’t increased much, despite the calls to better-fund big or small businesses alike, since the TARP implementation.

And, as this becomes a ‘race against time’; we absolutely understand why there is so much debate as to whether the perceived (or purported) stimulative benefits of TARP or related ‘bailouts’ kick-in in time to prevent even deeper duress; or whether banks it seems (and we lean towards this view) are reliquefying themselves as best-able now, so that they may handle the delinquencies, defaults, and further write-downs that are from loans they absolutely have on their own books; unsold into secondary markets.

Daily action . . has seen our expectations for rebounds couched with cautionary bits of concern; because though a rebound to (essentially) the S&P daily moving average was a reasonable expectation, and had to be accompanied by oil gains to succeed; it is still an appropriate and seasonal relief rally; as may wind-down in early December.

At the same time; the ‘crash’ conditions were assessed (for a couple weeks now) just as history (and we’re honored to have harvested excellent gains while sharing feeling for those who were led like sheep to have portfolios shorn since the last harvest). The risk/reward situation is going to emerge into an ‘indecision pattern’ any day now; as it becomes recognized that banks may have funding, but won’t lend if not expecting the likelihood of getting paid back. Further, the shock to consumers has been so severe it seems; that even if offered new credit, most would be quite foolish to accept it flat-out as if some sort of return to what preceded all of this would be likely.

Government sure is pushing for ‘reflation’, as they have little choice amidst a quasi-Deflation; and that’s a good thing in the very long run if the American people who forgot recapture what is the meaning of a Dollar; though Government is planning to demean that by virtue of the ultimate inflation, which will see both a return to Dollar depreciation and higher or destabilizing interest rates, in another saga. That will promote hard assets later on; to the risk of certain asset classes or stock sectors, while benefiting others. We’ll focus on it at the time; and took our initial position (not for a trade but as an investment we suspect) in oil stocks essentially at or very near the lows a couple of weeks back. As this market remains cloudy for the months immediately ahead (if they clear we’ll sure try to envision more), it made sense ‘not’ to press the downside and take initial longs, while harvesting gains from preceding shorts, as in the ‘race to zero’, it was thus won.

Roughly (subject to change as it evolves) we’re thinking about a peak of this move in early December; a retracement that probably won’t be disastrous (barring terrorism or some extent influence), then a mild yearend rise which many will presume to resume the move we’re in right now; then there is risk of running into a resistance brick wall. I think it’s too soon to evaluate the probabilities of that, or the extent of ensuing wrecks so stay tuned in that regard. If retail sales are miserable this year, most will bemoan it of course; but I’ll suggest it may mean that it’s a constructive step in a needed ‘rehab’ for the consumers of this Country, who are going ‘cold turkey’ from insane shopping. In a sense it may mean less than available credit; than it does ‘addiction reformation’.

Party time or dire consequences . . . seem to be the alternatives analysts focus on at this point, as debates about a potential huge rally seem to dominate discussions. I think neither extreme makes much sense right here; for reasons that we’ve touched upon lately. Meanwhile, swings from last week’s fairly evident trough developed just a tad beneath the 2002-’03 lows by the S&P, and just shy by the Dow Industrials, likely are what this particular battle is really about; versus the earlier Fall of 2008 low point.

In the meantime, a healthy dose of suspicion remains valid. Corporate Bonds are in a state that they are for a reason; commercial property ditto; the impossibility of policies that seek to ‘spend and save’ concurrently, are suspect. And then there’s the ‘what if’ we do get a bottom. Won’t energy prices stay down with all the alternative energy as well as Brazilian oil coming onto the market? May help somewhat; but will that occur fast enough? Ironically, the recession creates some breathing room to achieve that of course; but what the bulls forget, is that if the economy recovers (here or abroad) too fast, then the risks of ‘peak oil’ return to the fore more quickly than likely anyway. This is not a consumer society than can handle everything thrown-at-it at once, and we’re already aware of wholesale capitulations of drilling programs (domestically in Texas), as well as the ‘steel crunch’, which (low demand) to a good degree is related to that.

Come to think of it; ‘capacity’ is shrinking in the U.S.; not just utilization. That means if we start to recover there will be a scramble to re-up capabilities; we should have to of course be so lucky as to deal with ‘that kind’ of problem; it beats deflationary disaster. But you can see these things are lingering in my mind; as too many ask about depths of a decline we already projected for two years; so as we go forward (whether or not it takes weeks, versus more likely months or more to validate low technical levels, for trading purposes), the forward focus starts to envision what a recovery would be like.

Actually it would be more reassuring if the rally came without any seasonal ‘money

In the last couple days, lots of analysts have been focused on interpolating what has merit, but is not new: to wit the nature of what corporate bonds say about equities as well as the implied ‘actual’ versus perceived valuations of any number of companies. What that was seemed more to be a defense of being bearish; rather than anything I think particularly new; as that is what this overall decline is about. (Not to mention the municipalities and state governments; most of which are increasingly pressured.)

The same can be said about ‘solvency’. As an issue it could almost vanish if analysts were able to detect a vital recovery in confidence, expressed in terms of housing and retail spending, or anything that takes the ‘deflation’ quotient off the table. Unlikely for sure, at this point, but we’re just making the point that restoration of some normalcy of course would go a long way towards taking the concern back to the lesser of evils, liquidity, than to solvency. We’ve argued solvency as the issue (especially for banks) for about a year-and-a-half, so even with capital infusions and/or debt underpinnings, it’s the ‘perception’ of solvency that’s enhanced; not so much the idea that the banks weren’t insolvent, or in some cases still aren’t. But technical insolvency is less crucial when there is this kind of backstop, and that’s why (if incredibly stoked far beyond the levels seen so far in terms of the TARP) pressure off the banks can be deceptive.

How so? Because lending isn’t really stimulated conditionally on these funding moves (at least not yet); thus markets or the economy can periodically cease up once more; as we move into 2009. The discussion of diminished GDP in-event the auto industry is left to swing in the wind, is not just a scare tactic by proponents. It’s likely a reality. If that happens, then the markets will have trouble digesting the losses sufficiently to mount the kind of rebound I think most investors would like to see; but if they mostly are concerned about the dilution of National wealth by all the stimulus, plus sobering contemplation of what lies ahead for the so-called ‘real economy’ next year, then the rally could have a lot of trouble being more than a set-up for eventually lower prices.

The ‘rub’ is that a great many stocks are already crashed as we’ve discussed before. It would be essential to pull the rug out from under the comparatively narrow portions as aren’t fully exploited to the downside, while those that are merely erode nominally. The perception of valuation is difficult; and not only as relates to the obvious financial sectors, where there’s no business model capable of resuming past decade activities.

What this comment comes down to is realizing that a contraction in economic activity levels is basically unavoidable, while there will be some areas (such as infrastructure later, in the middle parts of 2009 at the earliest as things get organized for recovery efforts) that do benefit when such projects become better crystallized. For the overall growth of the Nation; there really isn’t much now. A question of degree of contraction. I suspect that is generally not trumpeted, because it amplifies the duration needed for an effective recovery; and alerts folks to the risk of other 2009 shoes still to drop.

Stagnating indecision . . . could characterize both the economy and stock markets, at least for a period of time as both projected catastrophic capital destruction impacts are absorbed, and the decline in individual and collective ‘net worths’ are digested. It is in the midst of this forecast ‘epic debacle’, that everyone wants to measure extents of pain experienced, or likely to be experienced, as the world’s largest debtor nation, which was a creditor nation during the Great Depression, attempts to muddle through the morass. While there’s no doubt that the nuances of day-to-day moves are distinct from where this takes the Nation overall; we’ve broadly pondered the imponderables.

Further; we’ve tried to make the point that the projected ‘panic of 2007’ was believed a prelude to the ‘crash of 2008’, and that (at best) a period of digestion would follow. I think it has been appropriate not to call for an enduring low without any evidence that at least gives visibility to the concept of the worst being behind (obviously may be for the stock market; but that doesn’t mean you can’t have ‘erosion’ of price relative to a premature recommitment, especially when the prospect of returning to income flows of the pre-bear-market past, are generally inconceivable for the foreseeable future).

Clearly; what has differentiated our strategy over the course of the past year-plus has been the avoidance of ‘going for the brass ring’ of every intervening rally, and instead remaining convinced that such moves would fail. And they all have. That won’t be the case forever, but there is a period of time that can be called an ‘indecision pattern’. In such a condition; there are various states of ‘indecision’. One can be clearly the stock market. Another can be the level of capital expenditure constraints on corporations.

I know the most obvious indecision one will be on the part of consumers. Also what will likely be the ‘least’ obvious; will be pressures on companies (despite protestation about tendencies towards protectionism, which will be roundly denied because this is an era for returning to ‘normal’, rather than globalist extreme alignments) to retreat from (or absorb losses in) emerging markets, that are (as forecast) now submerging.

And then sometime next year the ‘relatively’ unscathed could have issues; especially if involved heavily in real estate and bridge loans, typically not resold in secondary or other markets. That’s where the commercial property issues could come to a head. If the events are accompanied (as is the case now from what we hear) that deflationary tendencies are compelling rent rollbacks and so on; well, that’s part of the concern.

There is also the need to contemplate not only continuing property declines, but the IMF’s illiquidity issue; which itself can limit the extend of these (what are international) increasing bailouts. Several active or former financiers or professors worked at either the IMF or the NY Fed during parts of their earlier careers. It may not be coincidental that they are typically negative on how this unwinds during good parts of 2009. Sure, maybe they’re too negative; but if so it’s because they tend to realize the implications of spreads; the message of the Bond markets, and how the ‘agencies’ are physically limited if confidence somehow is unable to be restored.

That takes us back to the future; the housing market. An area not only unlikely to be restored quickly (a large portion of previously ‘modified’ loan agreements already are newly going into foreclosure, or did you hear that story in the financial press?), we’re very sympathetic to the chores ahead for the President-elect and his team. It will not be easy; it is going to be a version of the ‘new’ New Deal; and it will all take time. The market may not emulate the 1930’s; but anything remotely close suggests alternating ‘post-crash’ noted volatility (series of irresolute up & down moves described earlier).

Conclusion: historic combined illiquidity was so gargantuan in the business world; or insolvency for much of the banking / institutional worlds; that for it not to triumph was delusional. Lest anyone misunderstand; we need solid 'velocity' of money to become energized more (since toxic housing debt is a microcosm of the overall debt picture); so anticipate 'velocity' created in ways that 'empower’ substantive American revivals.

Bottom line: macro signs interpreted; including (consolidated slightly) the following bullet points:

MarketCast (intraday analysis & embedded Daily Briefing audio-video). . . remarks forecast substantive failures by banks or other areas; following breakdown action, as we've outlined. Remember; back in early 2007 we denied the 'liquidity' momentum as a canard; believing housing only the first of the asset bubbles to deflate. We outlined structured investment vehicle failures; banking issues, confluence of asset deflations, and more; continuing with interruptions per projecting long ago: 'a perfect storm'.

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 videos follow.

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.)

By the way; at the close today little PURE got hit by a 100,000 share block of stock, taking it down to 2.06. Interesting the preceding and next trade (shown on NASDAQ as a series of trades) was at 2.31 and the bid ‘never’ dropped down to the 2.06 area. While we don’t know if that was a ‘cross’ or some short trying to play games near the day’s end; we view it as irrelevant, and remain optimistic that the company’s progress goes on as they’ve outlined. We would be disappointed if we got to Christmas and by then at least one substantive further contract or distributive arrangement wasn’t sort of finalized; because the inference from the ‘conference call’ suggested this year still.

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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 must focus on Middle East and World War III avoidance.

Our 2007 view: we were heading into a recession or potentially worse. Preventing it descending into something akin to post-railroad debacles way back in the 1880's; is precisely what the Feds combatted here in 2008. Actions affirm they remain engaged to stabilize monetary fluidity or functionality; as we argued for months; and has now gone into 'overdrive' so to speak (refer to prior comments for expanded discussions).

McClellan Oscillator finds NYSE 'Mac' fluctuating with intervening bull-bear shuffles; overall bias transitioning from ‘crash’ mode to something else, as noted. Reflex rallies allowed 'risk off-loading' tactics earlier this year. Still too much comparison with last ten years; slower growth prospects post-bailouts makes it realistic that price multiples associated with earlier market eras predominate. Recent purges helped multiples on earnings to more realistically contract overall. Now a process of alternating moves, it is fairly irrelevant as to whether or not the S&P reaches theoretical lower measures; a lot of which is going to be dependent on factors not yet even particularly evident, and which won’t be until well into 2009. This will be addressed as more evidence gleaned.

Issues continue including oil (as was too low vs. too high earlier in the year); terror; China; Pakistan; all the Middle East, Europe; dubious NY commercial property as well as lots of non-housing entities. Noted for a year: international dependencies, as outcroppings of extremist globalism; from which there is a veiled retrenching already. We must be 'Americans First'; or we can't ‘consume’ from the world, as they prefer it. As was consistently argued here for over a year; this clearly proved to be realistic.

Twenty-two months ago I commenced projecting an 'accident waiting to happen' as affirmed historically after long-duration periods of free money (Gilded Age mentality). Such doesn't create enduring liquidity; just gives that interim illusion; we postulated in 2007. Do not overly focus on particular price levels associated with big-cap lows. It will be useful for trading Indexes of course; but sector-rotation will define bottoming in the course of a year or so ahead; as what we don’t have is a ‘V bottom’ and panacea.

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 in the same style). It is not a structure entirely resolved by rate cuts, stimulus, 'miracles', arrogance of the few who think they can influence it. But it can be rescued by sound incentive policies.

Not only is governance from the center appropriate; but essential to sweep a higher tide enhancing meaningful efforts to restore primacy to regain financial sovereignty. It is underway; but is a long-haul kind of process. Meanwhile, the desperately needed leadership initiatives that deflect this being even a worse debacle, are coming slowly together; but will take time to activate; implement, and then find necessary traction.

Wishing you and yours a Happy Thanksgiving weekend !