Dangerous Chemistry: Politics + Markets = Shambles

Gridlock on Wall Street equaled political doubts . . . as investors struggled mightily to make sense out of a National Election that had more similarities not just to the shifts of NASDAQ, but to a Superbowl Game that went into overtimes lasting 'till dawn, and that still is not over. Though some say Candidate (President-elect?) Bush is rushing to judgment by being rumored planning a 'victory bash' tomorrow night, the Florida Secretary of State says no 'official announcement' will be made on Thursday (though we heard that wouldn't be so if the total number of outstanding or absentee ballots wouldn't change the outcome even if all were for one Candidate or the other.

Ironically, we did speculate here in the DB over these last couple days, about a little bit of 'post Election blues' profit-taking (buy the rumor, sell the news), though this isn't exactly what we had in mind (who could have foreseen it quite this way). Several days ago we pontificated a bit about the comparatively little known structural difference between a Republic and a Democracy; and hoped America's Constitutionally-unenlightened wouldn't have to learn it rapidly, in very complex ways, as to how and why things were set-up as they were by Patrick Henry as well as Jefferson.

Little did we know how propitious in fact the comments were; though now the question is whether the market's reeling, particularly in technology, more as a result more of an absence of resolution for the Presidential race (with details mired in Florida's swamps), or renewed telecom weakness. The idea that fiber optics (or more basic Networking areas) have found supply fulfilling demand is what's really behind much of that selling, at least on the very short-run, as broadband demand is said by some (over the past couple weeks really) to have either slowed, or temporarily stalled.

It's probably a combination of both, though ironically the idea of a period of rapid contraction after the vote was actually a bullish alternative (long term); so that may prove to be valid in the days immediately ahead of this current air-pocket, regardless of which causal factor one wishes to ascribe to it for the very short-run (such as sector worries). Last night we noted the slight nominal negative change in the McClellan Oscillator reading, supporting prior ideas of a post-Election sell-off here; though the nature of the hammering was more serious in NASDAQ and particularly Nasdaq 100 (NDX) issues, than practically anywhere on the New York Stock Exchange; though that's only momentarily as certainly all markets suffer the longer an Election remains unresolved.

So the wafer-thin results Tuesday are pretty clear (regardless of the heat in Florida), as backers of any legislation viewed as extreme realize the risks of antagonizing voters anytime soon. Sure, we may get some tax cuts of a minor nature, or a repeal of the 'death tax', though there shouldn't be any doubt that the popular vote was so 'down the middle' that there's no mandate for radicals of either stripe (extreme right or left) to have any hope of enabling legislation getting far. For the stock market this may eventually be bullish, as if little substance gets changed, then the surplus (if any, depending on the depths of economic slowing, or thereafter, as the case may be) will be used in a way to continue unwinding the deficit, along with some modest chances to bolster the military, via primarily modernization spending. Thus at this point, we think the stock market has what is an acceptable (not saying we're endorsing it; just that it's not particularly bearish) political or neutral backdrop, under which 'centrist policies' are seen as acceptable (and little else); that's something President Clinton learned some years back, and his embrace of that view is precisely why he has consistently rated well, regardless of other (more debatable) aspects of his persona. And let's not even start discussing Hillary, or we wouldn't have to stretch too far to envision her in a challenge of the Texas Governor, should he assume office, and run again four years hence.

Empirical evidence . . . is all we have to work with in the market, and our lives, and ideas about the future, as regards technology and cyclical economic trends. On the former, we think the near dead-heat in the popular vote tells us it matters comparatively little to Wall Street who wins now.

On the latter, it's our view that the demand for telecommunications and broadband is not satiated for the long-term; though as has occurred with most technologies historically, there are lags as a capability versus usability contest sorts out (it almost always sorts out with a need, but rarely just as rapidly as the investment bankers of the IPO's in the early-stage stocks would have investors believe), which is something we've occasionally pointed-out in discussions about 2nd Generation or newer optics, which actually would supplant the earlier non-cost-effective parts. This is what in fact you're hearing about (when not drowned by politics) in the financial media as well today.

In our view the decline has been ongoing for many months; optics were among the few bastions of strength remaining; and the other was storage. Storage stocks are declining right now. And at the same time others that provide much of the facilitating software for storage are collapsing too. (EMC (EMC) and Oracle (ORCL) come to mind off-hand.) Less spending on all this, more debt reduction (as a wise American electorate essentially voted against any lopsided extreme), and a slowing economy also translate to more pressure on a Fed to ease-up further in months ahead.

Historical (and Hysterical) Chemistry

Let's see; lower taxes, debt reduction, pressure to drop interest rates and a slew of already hard-hit and decimated share prices, with the last remaining holdouts cracking recently and right now; that just might equate to the post-Election washout preceding higher prices. And then there's the Comdex gathering next week, as well as a minor Expiration in the same week; hmmm…that sounds like this exhausts and rebounds very sharply; but only if Election litigation isn't enduring.

Now of course, a long dragged-out battle between the politicos in the court system would be very bearish; but that's not (at least for now) our expectation of how this will go. And the deflection of the NASDAQ from the 3500 level was the expectation, though right now it is very fragile, legions of technicians are climbing on the bearish bandwagon rapidly; and the last time they did this we in fact mounted a dramatic rally within several days thereafter. Don't know what would trigger it; (reserved); might be out of the blue; but for now our own work suggesting this decline (making it look like a bearish rally in completion phases, which of course it eventually could be), but also a pullback from overbought just at that point we expected advances to be contested in extensions of a 'right triangle' or 'diamond' sort of pattern, after which the next (extremely important) upside effort would likely be mounted; again after this expected period of post-Election selling (that did not of course know how complicated this would all be, but nevertheless expected some selling).

In any event, if the plans for (any) Inauguration go forward, or we have definitive announcements from Florida, without waiting 10 days as threatened by Florida's Secretary of State, then this will be a very short-term affair. If not, then it gets messy first, before coming back later. Just because lots of money came into the funds coffers last week does not mean it's been put to work; actually money managers are often not oblivious to such things as overbought markets and Elections; so we could have an interesting historical chemistry of Comdex, Expiration, Election (finality), and short-covering; all of which could characterize much of next week's stock market action scenes.

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The market doesn't like uncertainty . . . was never driven-home more effectively than today; at the same time the inverse of that could soon be true, where once things are 'certain', stocks will be rallying rapidly to offset the drops, negating the mild-breakdowns below support Wednesday. However, we must respect the 'official' Florida statement that this won't be finalized tomorrow; so it has to be considered in a form of suspended animation until formally resolved some days out.

After discussing these views; where do we stand now? At this point, hotline's (900.933.GENE) flat S&P's overnight, but is not necessarily bearish long-term, even though we have done shorts. (As of mid-afternoon Thursday, the hotline has reversed a homerun short-to-long; temporarily.)

Across the Pacific . . . matters are occurring that should be of interest to American investors, as their focus might shift slightly away from the domestic political stalemate to something else: more companies having problems, which could (in worst-case theory) lead to a near-mini-sequel of the 1990's 'Asian Contagion'. It is our information from (normally reliable sources) than many of the smaller companies in Korea, as noted in a comment we made several weeks ago, are troubled and pressured by an economic slowing in the United States (balance of discussion is reserved).

On the plus side abroad . .Oil import costs continue to drop, which is what we forecast from the spike over a month ago that was expected to be only of temporary duration, precisely why stocks of many major oil and service companies commenced heading down in price, not up. Our view in fact held that Oil was bullish for the preceding two years while nonsense about 'no inflation' was the primary argument among some analysts (without any real basis given non-recurring events that contributed to a set of circumstances not readily repeatable). From the higher 30's during the recent (ongoing one might note, though a bit stabilized it seems) crisis, December Crude Oilhas eased considerably, and working on breaking the primary uptrend, or at least parabolic run.

In summary . . . the McClellan Oscillator eased from +110 to around +90, after a nominal –2 change in the prior day. Historically, about 3 out of 4 times the market will have a 1% change or more within a couple days of such a nominal change; especially when not at great extremes, as noted last night. The market remains fragile, is staring at a pattern looking remarkably like what would be a failure from a maximum rebound in a bearish structure, but that may get challenged in the days and weeks ahead; though the timing is variable, as discussed in tonight's comments.