The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

[NOTICE: the newsletter will be on hiatus for the next three weeks as I must finish some projects. I know the timing is lousy, but please forgive me.]

This Week: Buffet Barron’s Bottom

Market Pulse

The esteemed Warren Buffet has asked each of us as a matter of patriotism to help put in a market bottom by buying US stocks. At the same time, Barron's magazine would have us believe that a bottom is now in place, and, even more speculative, that the current economic recession will neither be as long or as deep as many analysts would have us believe.

The Barron's magazine argument for a short recession has been put forth by Gene Epstein. His claim is that falling energy and gasoline prices will put money in consumers’ pockets and literally read fuel consumer spending. This is a particularly interesting argument when juxtaposed against and historic drop in consumer confidence that suggests many people are simply terrified.

Epstein's even more implausible argument is that net exports are likely to "continue to boost growth." Forgive me, but this is just flat out stupid. Not only is the dollar gaining in strength against currencies around the world. The rest of the world is going into a severe recession or considerably slower growth. This worldwide phenomenon is going to take a very heavy toll on US exports.

My bottom line is that it may be a little too early to jump in this market with even one foot. The best way to make money in the stock market is not to try to pick tops or bottoms. Rather, it is to leverage the meat of the market move once the trend is been established.

Wall Street Survivor

Wall Street Survivor is a great new trading tool where you can simulate your trades.  I’ve volunteered to provide weekly stock picks to teach macrotrading.  I’m taking a conservative approach – no short selling. 

My intent is to help beginning and intermediate traders.  Click here to see my previous stock picks and visit Wall Street Survivor.  (Under the rules of Wall Street Survivor, I must make at least one trade a week.  This is fine for a teaching exercise like I’m doing.  However, in my own trading, I often remain on the sidelines in cash.) 

This week, I recommend building positions in several biotech stocks which have been beaten down by the stock market collapse.  Stocks include: Micromet (MITI), Halozyme Therapeutics (HALO), and Chelsea Therapeutics (CHTP). Biotech stocks generally are insensitive to the business cycle but have been sucked down by the vortex. Biotech stocks generally moved more on news about progress, or lack thereof, related to their drug pipeline. According to Roth Capital, all three of these stocks have upcoming news events that will likely boost the stock.

Presidential Politics – PRESIDENTIAL DEBATE ANALYSIS REDUX

I am a big fan of Peggy Noonan. However, her latest opus in the Wall Street Journal left me baffled. She claims that John McCain won the last debate. To me, it seemed more like he made a fool of himself pounding on the "Joe the Plumber" theme.

Peggy Noonan did get it right when she opined that Sarah Palen had yet to distinguish yourself clearly in the eye of the public. Absent some exogenous shock, this election is turning into a landslide. And by the way, as each day goes by, John McCain reminds me more and more of Capt. Queeg.

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The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: A Toe in the Tech Waters

Market Pulse

Last week I opined that “the real possibility of a panic-induced crash now enters the picture.”  No truer words have ever been spoken.

Considerable risk still remains to the downside. However, I do think it is time to begin to consider selectively going long this market. The trick will be to find the right sectors that will lead any rebound – and some undervalued stocks relatively immune to cyclical pressures. You can rule out anything to do with energy and commodities. A global recession is now guaranteed, and pressure will continue to weigh heavy on these key factor inputs.  Ditto for banks, the financial sector, and homebuilders – at least til we see how the bailout takes hold and headline risk diminishes..

What I like from the remainder for sectors is tech.   One strategy that may be effective here is to SLOWLY begin to build a position in XLK – the tech spyder.  In this strategy, you start small and add small pieces as market conditions dictate.  Plus, if this trade goes South, you can cut small losses.

The other possibility is to start building positions in some biotechs.  For some reason, this sector has fallen deep into the tank – its non-cyclical characteristics notwithstanding.  I’ve got positions in a number of biotechs which I think have more upside now than down.  These include Biodel (BIOD), Chelsea Therapeutics (CHTP), Halozyme (HALO), and Neurogesx (NGSX).  Be careful with CHTP and NGSX as they are fairly illiquid.

NOW HERE IS AN OPED I WROTE THAT MORE BROADLY ADDRESSES THE CRISIS FROM A POLICY LEVEL

Cutting the Gordian Knot

Why has global stock markets plunged? Why has the global economy plunged into a recession? Why do governments around the world appear to be so powerless fighting this crisis? By answering these three questions, we may see a way out.

Global stock exchanges have plunged because stock prices reflect expectations about a future stream of corporate earnings. When the economy softens, investors expect corporate earnings to be lower, and they started dumping shares.    Once that bearish trend starts, it does not reverse until investors are confident that the economy is recovering.

The global economy has plunged into recession because all four components of economic growth are in distress -- consumption, business investment, government spending, and net exports.  Consumers now face a very significant “negative wealth effect” that is eroding their ability – and willingness – to spend.  This negative wealth effect has come about from higher energy prices, the collapse of housing prices, and a collapsing stock market.  Today, as consumers wake up to incredibly shrinking portfolios, they are fearfully pulling in their spending horns. 

On the business investment front, the onset of a recession has severely cut cash flow along with both the ability and willingness of executives to undertake new capital investment.  With credit markets frozen, businesses cannot even properly finance ongoing operations or meet payrolls  -- and layoffs mount .  The bailout has not yet undone this damage.

The picture for net exports is equally grim.  Over the last year, a sharp rise in US exports helped stave off recession.  This rise in US exports was driven by a dramatic decline in the value of the dollar, which improved US competitive advantage, and robust growth in both Europe and Asia, which fueled export demand.

Today, however, virtually all the major economies of Asia and Europe are slipping into recession or slowing down dramatically.  Meanwhile, the US dollar has regained some of its strength in the face of global weakening.  Both of these forces are hitting US exports hard – even as both Asia and Europe find it increasingly harder to sell to the US.

It is for all these reasons that the fourth component of the GDP equation -- government spending -- will be pivotal in any solution.  During the Great Depression, the great British economist John Maynard Keynes figured out that when consumption, business investment, and exports all fall, the government can step in to fill the spending gap to jumpstart the economy.  Today, however, ideological conservatism has not only perverted the use of a traditional Keynesian fiscal stimulus in the US. Government officials are also far more inclined to rely on monetary policy and the use of interest rate cuts to fight recession.

The perversion of Keynesian fiscal stimulus has come in the form of a strong political preference in the US for tax cuts rather than increased government spending to jumpstart an economy -- just listen to both presidential candidates prattle on about this. The obvious problem with tax cuts is that there is no guarantee that consumers will spend them -- particularly if times are tough.

A similar problem exists with monetary policy.  It now seems that with every  turn of the recessionary screw, the only thing the US government knows how to do is to cut interest rates.  Monetary policy is, however, notoriously ineffective in a recession. The reason is that you "can't push on a string." No matter how low the U.S. Federal Reserve sets rates, business executives will not invest in new capital equipment and consumers will not buy big-ticket items like cars and houses if they believe the recession will continue.

How can the U.S. see its way out of this mess – and resume its role as the locomotive for Asian and European prosperity?   The first thing America needs is a political leader with credibility who can, like Franklin Delano Roosevelt did during the Great Depression, convince us that there is "nothing to fear but fear itself." This political leadership is essential to restoring the economic confidence of both business executives and consumers.  Will  Barack Obama or John McCain be up to that task?

The second thing the U.S. needs is a traditional fiscal stimulus with a very 21st-century focus. A significant increase in government spending on programs aimed at energy independence, housing market stability, the rebuilding of America’s aging infrastructure, and the provision of affordable healthcare would truly be an appropriate fiscal policy.  Only when the U.S. recovers, will Asia and Europe follow suit.

Wall Street Survivor

Wall Street Survivor is a great new trading tool where you can simulate your trades.  I’ve volunteered to provide weekly stock picks to teach macrotrading.  I’m taking a conservative approach – no short selling. 

My intent is to help beginning and intermediate traders.  Click here to see my previous stock picks and visit Wall Street Survivor.  (Under the rules of Wall Street Survivor, I must make at least one trade a week.  This is fine for a teaching exercise like I’m doing.  However, in my own trading, I often remain on the sidelines in cash.) 

This week, I recommend XLK.  This is an exchange-traded fund that tracks the tech sector.  I think the market is oversold but want nothing to do with traditional cyclicals like energy and commodities and heavy industry.  Nor do I want to be exposed to any more headline risk associated with the financial and banking sectors (or homebuilding).  XLK is a pure play on a possibility market bounce IF all the global bailouts and stimulae take hold.  Start with a small position and build on it as conditions warrant.  Be ready to cut your losses if the crisis takes a further downward turn.

Presidential Politics – PRESIDENTIAL DEBATE ANALYSIS

The young, inexperienced guy looked very presidential. The old guy just seemed irascible and paced so much that Tom Brokaw's coffee got nervous. Meanwhile, the bottom has fallen out of the Sarah Palin market.   Two thirds of the country are frightened to death that she is a heartbeat away from John McRascible. 

And by the way, I chose to watch the debate on CNN because they have this neat little gadget that records in real time how undecided voters are feeling about what each of the candidates may be saying at the time. Every time that McCain attacked Obama, the sentiment graph fell into the negative red zone. Memo to John: your job is not to attack Obama but to make a strong case that you're ready to be president. Let everybody else in your campaign and your party take their swipes at Obama. You must stay above the fray.

Quick Takes

1. How about Nouriel Roubini for Fed Chairman?
2. So hope all this stuff cooked up around the world works
3. I caught Mike Huckabee on Fox news speculating that Al Qaeda might be behind this whole global meltdown. Boy, that sure helps solve this crisis Mike. Paranoia is great for the nation's confidence.

THE CHINA EFFECT

Please see my latest You Tube report. 

Readers Write

I got a lot of letters and phone messages like this.  My advice is that if you didn’t follow my advice last November and move to cash, it’s way too late now to start panicking.   Yes, wait it out:

Hi Peter,

You and many others now tout that cash in king.   Although I am now 50% in stocks and 50% in cash.  What do I do now?  Sell the rest?  Wait it out.  Buy gold?  I am 48 yrs old, my stock portfolio is generally decreasing every day.

Linda

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The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: Crash, Boom, Bang

Market Pulse

The biggest bailout in global history will prevent a depression, but it will not prevent a likely severe and prolonged recession.  Consumer spending is falling with diving consumer confidence and shrinking portfolios and a collateral “negative wealth effect.” US exports are being hit by a slowing global economy and a strengthening dollar.

The markets will recognize the inevitability of the recession and its impact on corporate earnings and remain in a downward trend. While the retreat has been mostly orderly since last November -- with a few short-term upward cyclical moves -- the real possibility of a panic-induced crash now enters the picture. After all, it is October and it is "tis the season." Cash remains King. Resist the siren song of any TV pundits insisting this is a "buying opportunity."

Wall Street Survivor

Wall Street Survivor is a great new trading tool where you can simulate your trades.  I’ve volunteered to provide weekly stock picks to teach macrotrading.  I’m taking a conservative approach – no short selling. 

My intent is to help beginning and intermediate traders.  Click here to see my previous stock picks and visit Wall Street Survivor.  (Under the rules of Wall Street Survivor, I must make at least one trade a week.  This is fine for a teaching exercise like I’m doing.  However, in my own trading, I often remain on the sidelines in cash.) 

This week, I recommend SHY.  This is an iShare that corresponds “generally to the price and yield performance of the short-term sector of the United States Treasury market.”  It is a speculation that short term interest rates will be falling, which will push bond prices up.  With the entire world in a global economic slowdown, central banks will be looking to cut rates to stimulate their economies.   I recommend a 5% of your portfolio buy.

Presidential Politics – Darn

I am tempted to declare the election over, but there would be no point in writing anything more in this segment of the newsletter for the next several weeks. Oh, what the heck. The election is over.

This election is over because of the alarmingly erratic way John McCain handled himself during the bailout negotiations. This election is also over because too many people think Sarah Palin is not qualified to step into the Oval Office.

These observations are non-partisan and relevant in this newsletter because the stock and bond markets now are adjusting to this reality. It's an open question as to whether Barack Obama will be more or less bullish for the markets than John McCain -- one which I will address in subsequent weeks.

Quick Takes

1. During the Great Depression, the one thing that America kept doing was rooting for their favorite sports teams. As I rooted the Los Angeles Dodgers on this week, it all seemed kind of eerie given the chaos in both the US financial markets and California's budget.
2. If I were a big holder of Washington Mutual stock shares, I would be raising holy hell right now. Just as Wachovia got a better deal from Wells Fargo in the wake of the bailout, so, too, should Washington Mutual.

THE CHINA EFFECT

Please see my latest You Tube report. 

Readers Write

Here’s my favorite letter of the week that provides some insight into the angst in the American heartland.  It is a response to a letter from a pair of readers who wanted to start trading their own portfolio right away with their pension funds. I strongly recommended against this and urged that they simulate trading for a while:

Dear Dr. Navarro,

Many thanks for your reply, we know you are very busy and taking time to offer this advice is greatly appreciated.  We downloaded StockTrak yesterday and will do the simulation training for the next several months before moving anything.  All of our holdings are in FDIC-insured banks, it's not much, but at least we are covered for now.  We also are looking into refinancing our house since rates are low, but the Northern Virginia/DC market - like most others - is dropping in home value, so we may have to wait.  We see a lot of angst these days among our active duty bretheren where I work in the Pentagon, especially with a new Administration coming.  All of this volatility suggests we should sit tight and let things recover.  We'll keep in touch and let you know how the training goes.

Again, thanks for your help.  You are a great American.

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