The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: Xmas Agonistes?

Market Pulse

I do not know if a market bottom has been put in yet. I believe that there is, however, a pretty good level of support that has been established now for the Dow at 8000. The question now is whether we are going to have a Christmas rally or simply meander around current levels right through the first of the year.

For the bear case, I think there is going to be a lot of selling before December 31 for tax purposes. This is likely to weigh down the market. I also think that a lot of traders who made money on this latest short-term rally are going to take their profits and close the books on the year.

As for why the market rally, technicians might say that the market was oversold. I think the biggest effect has to do with the famous FDR saying "there is nothing to fear but fear itself." On this note, the market is above all else a confidence game. I think Pres.-elect Barack Obama injected quite a bit of confidence in the market with his appointment of a seemingly well-qualified economics team and, more importantly, his promise of the mother of all fiscal stimuli for the new year.

Beyond American shores, international markets are also responding favorably to the actions of central banks around the world. China has followed its announcement of a major fiscal stimulus up with a fairly significant cut in its interest rates. At some point soon (probably this week), the ECB is going to get more fully on the interest rate cut bandwagon – although an inflation-conscious Germany has pretty much kept Europe's central bank behind the curve.

Some of you may be tempted to start building positions in this market. I think the time to do that was last week. This next week it may be better to continue to watch and wait.  On this note, the news continues to be grim. Europe is settling into the deep and ugly recession -- with the unemployment rate in Spain over 12%.. Japan has returned to its basket case status. Brazil is having all sorts of credit problems. Housing prices continue to drop precipitously -- which suggests more problems in the credit markets from deleveraging. I still await the storms are likely to calm from state governments like that a California facing significant budget squeezes from credit constraints. And so the story goes. Let’s see how bad retail sales are in the US.

Last take: I noted with some amusement that in a survey of mutual funds, every single one of the more than 11,000 funds analyzed are in the red for the year. How about them apples.

Please forward this newsletter to a friend!

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: Bad to Worse to Worser

Market Pulse

IN THE U.S.:

First, the housing market slowed consumer spending down.  Then, the wave of deleveraging spawned by mortgage derivatives froze up the credit markets and slowed business investment down.  Then, a rise in the dollar and a slowing Europe and Asia slowed export demand down.  Then, as layoffs began, people started spending less either because they weren’t getting a paycheck or because they began to fear for their jobs.  Then, as the financial markets began to collapse, people spent less because of rapidly shrinking portfolios.

The next shoe to drop on this centipede is a sharp cutback in spending by local and state governments.  These governments are not only collecting a lot less revenue.  They are having a devil of a time financing and refinancing their budget needs.  Moreover, when they can get money, it’s very expensive.

The worst part here is that our government doesn’t seem to know what to do.  Despite dedicating hundreds of billions to stabilize the housing market, foreclosures continue apace.   Despite the dangers of letting the U.S. auto industry go down the tubes, politics is trumping economics.

By January, we are going to have a new president and what’s shaping up to be a stellar cabinet presiding over an absolute train wreck.

IN THE REST OF THE WORLD

Europe, Japan, and Russia along with half of Asia are in, or slipping into a recession.  China is gearing up its “beggar thy neighbor” policies by increasing export subsidies on 3,700 products.  Ugly is as ugly does.

From this snapshot, it’s easy to see why the markets continue to circle round the drain.  Still, me thinks a bottom doth be approaching.  So do your homework and get ready to jump in.

For those with cash (i.e., the people who followed the musing of this newsletter) and for those with at least some appetite for risk, the play is going to be to layer into the market, starting with small positions and building them.   Stay tuned..

Please forward this newsletter to a friend!

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: Have We Bottomed Yet?

Market Pulse

I got a lot of emails protesting the absence of this weekly newsletter for the past month. However, before I went on hiatus I gave you all investment advice you really needed. Here is what I said on the Oct 24 edition:

“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.” 

I also got a lot of e-mails protesting that little piece of “stay on the sidelines” advice as there were a lot of folks out there who thought a bottom had been reached. Au contraire mon bozos.

The bigger picture here is that it is just plain foolish for any trader or investor to try to pick a bottom. As I said in the earlier quote, the best way to make money is on the meat of the move once the trend has been established. So far, no new upward trend is even remotely on the horizon.

So enough of my lecturing. What you really want to know is whether a bottom has been reached. I get that.

The real question you are asking when you ask whether a bottom has been reached is whether the economy has further to fall. The stock market will only put in a bottom when the economy has stabilized and the groundwork has been put in place for the resumption of economic expansion and the return to corporate profitability.

Based on that litmus test. Stock market risk remains to the downside as all four components of the GDP equation that drive economic growth remain in trouble.

Consumer confidence in countries around the world is at historic lows, unemployment is rising and incomes are falling, and we are staring dead in the face of likely the worst Christmas season for the last four or five decades.

Business investment remains moribund as it still remains unclear whether the credit crisis is over. While there is much talk of fiscal stimulus, politicians have yet to belly up to the bar for any credible Keynesian fix.

Finally, from the United States and Europe to China, exports are falling significantly with softening global demand. In addition, in the United States, a stronger dollar is further discouraging exports. On top of all this, there is a growing risk that some state and local governments may default on some of their bonds as they are engulfed by budget crises.

So, yes, I would say that there is a significant chance that the economy will continue to get worse before it gets better. In that scenario, the stock market will continue to fall through levels of support as it seeks the real bottom.

Please forward this newsletter to a friend!