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Sunday, March 30, 2008

Weekly Newsletter -- Week Ending April 4, 2008

Sell the Rallies, Short the (Industrial) Metals

The U.S. market is in a clear downward trend.  Relief rallies occur as Bernanke runs the printing press.  However, there is an “unvirtuous encirclement” emerging to strangle any hope for a renewed upward cyclical trend.  From a macro view, here are the kinds of disparate events that I find so troubling:


  1. Wheat is soaring and rice rises 30% in a single day as major exporting countries slap on export restrictions to avert rising prices at home.  Food riots erupt in Burkina Faso, Cameroon, Egypt, Morocco and Senegal.  Thai farmers are sleeping in their fields to avoid theft.  Stagflation and geopolitics a deadly combo.
  2. While Germany and France and the Eurozone is generally holding up, some countries in the zone like Spain are being taken down by their housing bubble and budget deficits.  Meanwhile, on the periphery, from Iceland and Turkey to Hungary, Latavia and Romania, inflation is rapidly rising against a backdrop of large budget deficits and budding hyperinflation.  If countries start collapsing economically, that can only spread.
  3. Japan’s economy and stock market have fallen back into a huge funk – this despite the burgeoning China trade.  We’re going on 20 years of nothing in the land of the Rising Sun.  There is a lesson to be learned for America….
  4. China’s inflation is now spilling over into its export sector and threatens both internal unrest and a hit on their exports and growth.  PLUS, come Olympics time, there is going to be a huge gap internationally in goods shipped as the country shuts down for a month.  Huge contractionary shock.


I see nothing but trouble ahead in the next six to twelve months or more, which means the market has not yet fully discounted all of the problems.  Nor do I see the U.S. political process resolving any of this.  Instead, we will have three candidates competing over how big or small the bailouts are going to be – but all will call for bailouts of some sort.


If the global economy does downshift and decoupling fails, industrial metals will be at the vanguard of commodities that take a hit – even as gold might remain an inflation hedge.  As for oil, it could go either way depending on the fate of the dollar.  As long as the dollar continues its downward trend, oil prices must rise, even in a global slowdown.



  1. I watched a video clip of James Altucher pimping a couple of biotech stocks, including SVNT on macro trend grounds – more people getting asthma.  Gotta laugh since the technicals are flashing a straight short on the beast.  It would be refreshing if some of these stock pickers woke up to the idea of picking stocks on fundamentals is fine but only if you properly time the entry using technical analysis.  On that ground, SVNT ain’t no buy now.
  2. Whether you are for Hillary or Barack, you can’t condone Obama’s legal ploy to disenfranchise the voters of Florida and Michigan.   That ploy is just as corrosive as the Supreme Court’s rigging of the popular vote in Florida in 2000 in favor of W. 
  3. California is officially now in play for McCain – remember the Golden State’s last two governors were Republicans.  (I’m not counting Gray Davis – He belonged to the Show Me the Money Party).
  4. Hank Paulson is off to China once again for another summit.  Tibet and China’s currency manipulation are said to be on his agenda.   Waiting for Godot will be shown in Mandarin for his pleasure in the Forbidden City’s Hall of Supreme Harmony.


6:43 pm edt 

Monday, March 24, 2008


This article appears in the Sunday, March 23, 2008 edition of the San Francisco Chronicle

Fed should focus on economy's bygone assets

Peter Navarro                      

   "First, do no harm." Federal Reserve Chairman Ben Bernanke should take this physicians' advice to heart. So far, everything he has done only drives us deeper into recession while making the dollar weaker, the stock market lower and oil prices higher.

   Why is our current economic crisis so hard to resolve? This question can only be addressed by first understanding the nature of the crisis itself and its origins in America's now-burst housing bubble.

   After the Sept. 11 terrorist attacks, a panicky Federal Reserve Chairman Alan Greenspan adopted an ultra-easy money policy, drove mortgage rates to record lows and got the bubble blowing.

   About the same time, China joined the World Trade Organization and used "currency manipulation" to dramatically boost its U.S. exports. In particular, to keep its currency undervalued and therefore its exports artificially cheap, China recycled more than a trillion dollars back into the U.S. bond market. This currency manipulation bid up bond prices, drove down bond yields, and further fueled the growing housing bubble by artificially depressing mortgage rates - all the while laying waste to America's manufacturing base and ability to create jobs.

   Over the next five years, "flippers" entered the market in ever-increasing numbers, often buying multiple houses to turn. Meanwhile, renter family dupes desperate to get into the market often were gulled into signing zero-down, highly risky adjustable rate "subprime mortgages" doomed to foreclosure. Unscrupulous real estate appraisers "helped" by appraising any property as high as necessary for a borrower to qualify.

   As a vital part of the bubble's creative financing, Wall Street began to slice and dice home mortgages into complex "mortgage-backed securities."  Huge financial institutions and hedge funds jumped in to speculate in highly leveraged schemes that allowed them to hold $20 or more of the securities per $1 of collateral. Like a deadly virus, these mortgage-backed securities spread out to infect portfolios all over the


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2:45 pm edt 

Saturday, March 22, 2008

Weekly Newsletter -- Week Ending March 28, 2008

This Week:  Tops to Bottoms

Last week’s historic actions by the Fed – and action on Wall Street – pose questions inquiring minds certainly want to know: Have the dollar and U.S. stock market reached a bottom and have gold, oil, and industrial metals hit a top?


Let’s start with the dollar.  The dollar has been under pressure for two big reasons: a chronic trade deficit and a series of Fed rate cuts which have dramatically increased the spread between U.S. interest rates and many other countries in the rest of the world.  For the dollar to have reached a bottom, one or both of those fundamental factors would have to improve.


Rule out any improvement in the trade deficit large enough to matter for the dollar.  However, the interest rate differential argument may carry some weight, particularly for the fate of the dollar/euro pair.  Indeed, as the European economy stalls, look for the ECB to possibly cut rates.  If the stall is bad, look for a very significant downward lurch of the euro.


Now what about the U.S. stock market?  A stronger dollar would draw funds back into the U.S. stock market and help prop it up.  But any real bullish move would have to come from an economic forecast that showed a shallow recession and relative quick rebound.  After all, stock prices are simply a reflection of the expectations of a future stream of earnings and only will rise if expectations improve.


Right now, there are some few voices insisting things aren’t as bad as they appear – the UCLA forecast for one which says there ain’t no recession.  However, ECRI just called a recession and sees a dim outlook ahead.  So it’s anyone’s guess, but a key ingredient will be whether the housing market finds its own bottom soon and whether the credit contagion has now been contained by Helicopter Ben’s money drop and bailout.


So how about gold?  It’s strictly an inflation and dollar hedge.  If the dollar stabilizes and the recession deepens, you damn well better be short gold.


The fate of oil more broadly hinges on the decoupling scenario we’ve talked at length about in earlier newsletters.  Oil will hit its top if and when the Chinese economy begins to show signs of significantly lower growth.  Ditto for industrial metals.  In other words, if decoupling fails, shorting oil and metals is a lot better side of the trade – the broader secular bull market in these commodities notwithstanding.



  1. Nobody cares if Bill Richardson endorses Obama.  And he should have been a lot more loyal to the hands that fed his political ambitions.
  2. The failure of Michigan and Florida to resolve the Democratic delegate issue augurs a very messy convention.
  3. China is totally blowing it with its handling of Tibet.  Trying to spin the Dalai Lama as Che Guevara is just plain stupid.
  4. Hank Paulson is the most short-sighted tall guy I’ve ever seen.
  5. Where’s Paul Volcker when we really need him?
7:53 pm edt 

Sunday, March 9, 2008

Newsletter for Week Ending March 15

The Well-Timed Strategy


Economic & Stock Market Analysis for the Discerning Investor & Executive



Read it and Reap!


Week Ending March 15, 2008                         Volume 9, Number 6        

This Week: Of Clinton, Obama, and Feldstein

It has been four months now since my call in this newsletter to move to cash or the short side and there is no light at the end of that tunnel.   In fact, at this point in time, there may be maximum obtuseness.  Here’s what to look for.


While a U.S. recession is now a near certainty, it remains unclear as to whether the rest of the world will decouple.  So watch Europe and China particularly carefully.


In addition, it is still unclear whether a stagflation scenario will manifest.  Yes, oil prices continue to spiral upward, BUT it is important to understand that MOST of the movement in oil prices is related to the falling dollar – not the fundamentals of oil supply and demand.  That means the “oil price shock” the U.S. is experiencing is contained largely to the U.S. and those countries that peg to the dollar.  That’s good news on the global stagflation front.  HOWEVER, balancing that is the fact that food prices are trending sharply upward, with no end yet in sight.  To parse all of this, watch the long end of the yield curve.  If it starts to move sharply up, it is likely to be signaling stagflation rather than renewed expansion.


Bottom line: be patient with your money and don’t succumb to the siren song of “this is a buying opportunity.”  If you must trade, trade biotech, which is immune to the business cycle.



  1. If Obama were a stock, it might be time to short him.  Yes, he’s got the delegate lead and Obama mania is still out there, but the Clinton message that he lacks experience to be president is now gaining traction.
  2. The ideal Dem ticket to resolve the current deadlock is Clinton-Obama.  It’s got the appropriate blend of attraction for old and young, Latinos and Blacks, women and men, suburban/rural and urban, and war pragmatism and war idealism. 
  3. The prospect of the Fed slashing rates again is bizarre, given the dollar’s weakness and the dangers of stagflation.   Bernanke is a one-termer and the next likely Fed chair is Martin Feldstein regardless of who captures the White House.   Feldstein would never run the kind of printing press that Helicopter Ben is running – mixed metaphors aside.
  4. Look for political activity related to the Beijing 2008 Olympics to begin to accelerate now – and watch how the Great Wall Stone Walls.
1:33 pm edt 

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DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

DISCLAIMER: The newsletters and blogging on this page are written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.

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