Targeting a BUY on Inflation Data

A "fade" in-front of the ECI and GDP deflator . . . were expected for Wednesday afternoon, as the market was already up against resistance (or actually slightly above, by our work which had already indicated 1470-80 as the only realistic immediate targets for the June S&P contract just ahead of the key economic numbers). Thus our daily expectations, and the realization today as well, were focused not so much any panic selling, but simply a dearth of buyers ahead of these presumed important numbers that come out in the a.m. Then there's the AT&T wireless IPO too.

First, with respect to that AT&T Wireless (symbol will be AWE), the syndicate has indicated the pricing to be 29 ½, which of course nobody will pay unless able to be subscribed within the IPO. (To new readers or investors, that means if the opening trade is 35, and the media says it's up 5 ½, no it won't be, as for anyone playing with it tomorrow, they should track the change from the opening trade when released.) Why mention it prominently here tonight? Because some are in "awe" about the importance of this IPO, expected by analysts to be the year's hottest IPO. If it is, great; if not, some think it casts a downward tone on the technology sector. Balderdash. To find out what's so hot, I used my dial tone to call AT&T wireless, asking about several advanced 'net services (already being used from them here), and found out from the wireless group that these multifaceted phones they're offering for now will still be limited to TDMA or CDPD basic PC data transmissions , not a bit more powerful than what many use right now (the latter are flat-rate, not based on per minute cellular bills, though most promoted services of course are, and with limited (Palm-like) services only for, say stocks, downloaded to the mini-screens on the new phones).

(Discussions about wireless services from other stocks we follow and/or hold are reserved here.) Market implications (psychologically) aren't nil, but probably less than those who see this as the seminal event for this year's market. Point being; the IPO enhances shareholder value over time, but it is not quite at the cusp of the newest (3G, which is two years away, and WAP, rolling now) standards, which go beyond TDMA, CDMA, GSM or other transmission methods, becoming very compatible, and really promises to transform the wireless world into high-speed unlimited realms outside of interoffice substation connections. For the near-term WAP applications will proliferate.

(The hottest this year will be a myriad of devices that allow wireless short-range Ethernet speed connections between a number of computers or laptops within an office, building, or for example, university; endearing everyone, as it promises to dramatically eliminate many jungles of wiring. It will even be feasible, with some of (reserved) devices, to walk into any office or far-away branch, press print, and documents comes out of any designated printer without infrared or a connection. Much of this will be using variations of "Bluetooth", which many are pushing hard.) In any event, the IPO will be modestly well received (say we), because this time (unlike a much more intense offering that sputtered, giving us an opportunity to buy LU in the low teens) AT&T employees are welcomed to buy through Fidelity, during a narrow window today. That Lucent (LU), surprisingly few believed in it; we said we loved it before it's IPO, and bought it enthusiastically on the cheap.

Economically . . . everyone is nervous about the ECI (Employment Cost Index). We're not. It's likely to show a sharp increase, as everyone points to, and even the strong spending on capital equipment implies, as part of this mornings Durable Goods numbers, which were modestly firm. Again, investors (and we expected that) shied from buying this afternoon in front of the number, and we basically agree with that. However, we suspect that anyone who sells or shorts in snap reaction to the numbers (that are the Fed's worst fears, but totally expected) will have their head handed to them in short order during the morning's course. In essence, you should see numbers that are inflationary, you could even see implications of higher benefits (indirect compensations or benefits like healthcare costs, which are rising again of late), and you could even get a GDP deflator which is sharply higher (more price pressures), all of which would bear the stock market in the early going Thursday. However, regardless of that, we suspect they'll rebound the market into mid-session, and then we'll see if it can ideally rally fairly sharply in the afternoon.

For sure enough reason to be flat June S&P's overnight; and for sure enough reason not to be chasing or buying, as stocks worked around resistance levels in a Wednesday session that really revealed nothing particularly unusual occurring just now, but not enough reason to draw dramatic conclusions beyond the numbers in the morning (we'll reflect on them on the hotline and then in tomorrow night's DB, as far as longer-range implications). The obvious is that everyone knows at a minimum that the Fed Chairman closely watches the ECI and GDP deflator, so if they're higher as generally suspected, everyone believes it's more ammunition for yet another funds rate hike or two. (balance reserved)

What's more likely, is that you take the market down early, but then scramble the shorts with the comeback into mid-session, along the lines of disappointing those who think they can respond to news, as if the market was that easy. The smarter trading play may be to buy a sharp early hit, and then close it out later in the day, depending on the action. And not worry about the long-term implications, if any. In this regard, from tomorrow's low, you could run stocks up a bit more even maybe all the way to month's end, and then run into trouble (where and as outlined in our calls). After the terrific 7000 plus S&P gains this week so far, we'll take the shot of buying a sharp early Thursday drop, and look for a meaningful comeback at least into mid-session, and then we'll see.

At the same time, keep in mind there's increasing worries about the Euro, which holds the U.S. Dollar fairly firm; and that Crude Oil (for June delivery) is now again under the $25 per barrel level, which basically means that forward expectations are less, not more, inflationary. At the same time, T-Bonds have backed-off only slightly, which continues to suggest that longer-term views remain for lower, not higher, interest rates way down the road. There has been speculation in some quarters regarding much higher rates, horrible stagflation, etc., but the markets don't say so, at least not yet. Nevertheless, a couple weeks ago during panic, the thing to do was to buy; while now, when things feel more comfortable, the thing to do was expected to be pulling back from equity aggressiveness, let the market sort out the daily economic news, expect some bit of alternating swings, and then some (volatility) in May (projection details reserved).

Daily action . . . meanwhile, had hotline (900.933.GENE) activity exiting the beautiful Monday long from 1425 in the June S&P at the very conservatively raised discipline and then a little short with a total gain this week running around 7000 points or higher theoretically, as we got our goal in the 1470-80 area, then took profits as well as scalped the downside a bit. Thursday's pattern is questionable, but might take the form of something like down-up-dip-up-and then we'll see. If it works through these key numbers, and actually closes firm, then the market will be in very good position going forward.

Bits & Bytes . . . is reserved for subscribers, but tonight touches on Apple Computer (AAPL), Conexant (CNXT), Digital Lightwave (DIGL), GM Hughes (GMH), Intel (INTC), Thompson Multimedia (TMS), Texas Instruments (TXN), and Rambus (RMBS).

In summary . . . the market turned late Monday afternoon, and we were ideally long from 1425. It was our expectation for the strength to build through Tuesday, and it did. Now that we looked for just a bit of a fade in the wake of the Durable Goods numbers, then a bounce, and then later another fade ahead of the Thursday ECI (and other economic) data, we sold the long for a very good gain, and actually scalped a short-sale in the June S&P, (looking to buy a morning drop).

The McClellan Oscillator eased a bit in harmony with the expected minor bias to the downside in front of the economic reports, and finished at around +52.

An ECI more than 1% higher would be dislocating, and support a sharper drop and failing rally in tomorrow's action (the red flag kind of action for the Fed); although some of this is discounted by virtue of being "in the market". Some believe the Fed now sees actual inflation, rather than just a perception; we think there's been an internal inflation for many months already, with massaging of the real information by certain gathering sources. Now that rearview mirror data shows higher inflation, Oil and other factors point to lower down the road. That may again mean that the Fed is fighting the last war, and not the next. As of 7:30 p.m. ET, on Globex, the S&P premium is 1241, with futures at 1472.50 or so, down about 300 from the regular Chicago close.