The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

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This Week: Sugar High

Market Pulse

Note that this will be the last newsletter before the New Year. I do hope everybody has a great holiday -- the financial and economic turmoil notwithstanding.

As I indicated last week, cash remains king in this turbulent economy and sideways market. I do wish my loyal readers would stop challenging me on this issue after every bump up in the market. Another case in point occurred last week when the Federal Reserve slashed rates to historic lows and, at least for a day, the bulls got their sugar high. Of course, by the end of the week, the Dow had turned negative while the NASDAQ and S&P 500 indices eked out a small gain. Remember: the market stall recover until investors believe the economy will recover.

More broadly, it continues to puzzle me as to what goes on in the head of Ben Bernanke. For a Princeton professor, he seems just flat out stupid. All he has accomplished in his tenure in office has been to help wreck the financial system and almost single-handedly debase the currency.

Now here's an idea: how about if President-elect Barack Obama engineers a trade with Europe in which Bernanke is shipped off to run Europe's Central Bank and America gets the current head of the European Central bank, Jean-Claude Trichet. Maybe Obama can throw Manny Ramirez in the deal just so that the deal gets done.

Unlike Ben Bernanke, Trichet has conducted a much more careful monetary policy. Bernanke must drive Trichet nuts, however. Every time the United States lowers its interest rates, it puts more pressure on Europe to do the same. Because Trichet see the chess board better than Bernanke, he's very resistant to being dragged along by the Fed's helicopter monetary policy.

Now, one of the other things I've been saying in this column for many months now there but which is not properly being heard is that California is likely to take the United States economy down another peg because of its severe budget crisis. A number of small cities in California have already gone bankrupt. Gov. Arnold Schwarzenegger announced recently that he going to cut the pay of state employees by 10% -- a contractionary shock. And, in general, the California economic train is careening wildly and will soon be thrown off the tracks.

Now, I would like to respond to an e-mail from a reader who wondered how I would reconcile the seeming contradiction between my support for a government bailout of the auto industry and my concern that Obama's proposed fiscal stimulus will backfire. The reconciliation is easy: Obama's stimulus will be in the range of $700 billion-$1 trillion while the bailout for Detroit is a relatively small ticket item in the range of $15-$20 billion. That relatively small amount of money is well worth spending to save a significant chunk of what's left of our manufacturing base. On the other hand, the Obama stimulus is going to be very difficult to finance without causing higher interest rates or inflation above.

I received a similar e-mail from another reader who wondered how I could reconcile my support for providing homeowners with foreclosure assistance with my concern for the Obama fiscal stimulus package. Again,the reconciliation easy. The Treasury Department is already spending close to $1 trillion trying to shore up the credit markets. My beef is that this money is not being spent in the best possible way, and I believe that more of that money should find its way into the task of mortgage relief – a necessary component of stabilization. On the other hand, with the Obama fiscal stimulus, we are talking about a whole new set of expenditures, many of which will likely be made long after the recovery is in progress.

Last take:

Check this blog out by a gentleman who rightly describes himself as the "Worlds Greatest Consumer Advocate" (with his tongue always in cheek).   http://michael.shames.name/nfblog/?m=200812.     The blog focuses upon the deficit of effective regulation by the Bush Administration and on how some greater scrutiny of consumer financial services as well as some microfinance via the SBA may offer a ray of hope to many of homeowners and property owners caught in today's bubble ramifications.

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: I Think, Therefore I am in Cash

Market Pulse

I got a raft of e-mails chastising me for being too bearish in last week’s newsletter after the market rallied on Monday. This is standard operating procedure for the Bulls with rose-colored glasses. The problem with most traders is that they are far more susceptible to getting sucked in to the "the bottom billion" hype to buy on up days, and that partially accounts for the long side orientation of most traders. That kind of psychology is a ticket straight to the poor house. And by the way, if anybody noticed, the market did finish flat for last week after its early bounce.

What annoys me now is the talk of a Christmas rally -- or more politically correct, a year-end rally -- and such chatter is now even appearing in the bearish Barron's magazine. Well, maybe there will be a rally and maybe there won't. Betting on such a rally, however, is not smart trading but simply a role of the dice. That's gambling, not intelligent speculation.

What intelligent speculation tells us is that before the market finds its bottom, the economy is going to have to find its bottom. Both the data and anecdotal evidence tells me that the economy is still likely to get worse than better. I think, therefore I am in cash.

As for the anecdotal evidence, we all know that a lot of people have lost a lot of money in the stock market, and this will weigh down consumption for some years. We also know that a lot of people lost a lot of money in the housing market, and this negative wealth effect likewise weighs down the consumption component of the GDP equation.

There are also some people out there -- and I know at least one of them -- who decided not to put their money in the stock market but rather base their retirement portfolio on rental properties, typically a very safe and responsible that. Nonetheless, the recession has now gotten so bad that even these types of investors are at risk.

Anecdotally, the story I heard from one poor soul is that three of four of his rental tenants are least three months in arrears on their rent, and this has put him in arrears on his mortgage payments. It would be a tragedy for someone like this to wind up in bankruptcy and without retirement money because of the ripple effects of this recession. I wonder why it is taking so long for the federal government to give relief to so many who are on the brink of foreclosure. We hear about all this money being thrown at the problem, but somehow none of that money seems to trickle down to Main Street -- or suburbia as the case may be.

The other thing that is becoming increasingly apparent to me is that this recession is hurting almost everybody. I live in Orange County, California, which is one of the richest counties in the nation. Despite this wealth, people are hurting. The prevailing joke now among a lot of the retirees I know goes something like this: "yesterday I was retired. Today I'm unemployed."

If things are bad here in Orange County, imagine how bad they must be in Michigan. What annoys the hell out of me here is that our government is willing to lavish tens and hundreds of billions of dollars from the likes of Citibank and an AIG but can't afford a paltry $15 billion to save US automakers and that significant portion of our manufacturing base that depends on Detroit. Of course, I can see a few of you out there reading this newsletter roll your eyes. Well, I do sympathize with the idea that we shouldn't be in the business of bailouts. But I am convinced that this crisis is not only worse than a lot of people imagine -- especially meathead politicians like Jim Bunning. I'm also convinced that once this recession is over, the US economy will continue to stagnate if it is unable to resuscitate its manufacturing base.

Turning to a more global perspective, Russia has now joined the ranks of those countries that have succumbed to recession. This, of course, is symptomatic of the collapse of the commodities bubble. Europe is still grappling with the idea of a fiscal stimulus -- Germany's prime minister fiddles while Rome literally burns. China's economy seems to have gone from fourth gear to second gear, with a lot of political grinding in-between. China's situation is reminiscent of the old theory out of the 60s by Walt Rostow about the "revolution of rising expectations." Millions of unemployed factory workers do not an harmonious society make. America will wind up paying the price for this because China will resort to an escalation of its unfair trade practices and classic beggar thy neighbor.

As a final holiday note, the family went out and got our Christmas tree last night. This late in the game it should have been slim pickings. But there was a surfeit of trees and few customers -- another sign of the recession's neutron bomb. Meanwhile Toys for Tots in Los Angeles ain't got no toys for any tots.

So here's my bottom line: it's too early in the game to go bottom fishing. The odds are better that we will retest lows then bounce off any established bottom. I'm willing to change my opinion on this at a moment's notice. For now, however, take care of your cash -- it will be very useful soon.

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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: Italian Jolt

Market Pulse

Last week, I urged a watch and wait position while the market continues to probe for a bottom. That turned out to be a reasonable call as the Dow lost 2.2% and the NASDAQ lost 1.7%. For the year, the Dow is down 35% while the NASDAQ has lost an astonishing 43% of its value. This is not the time to get enticed by media pundits urging you to jump in with both feet.

While the unemployment toll jumped by over half a million Americans in November, the statistic that really freaked me out was one reported on the back pages of the Financial Times. Over the last two months, Italian industry has cut its electricity demand by almost 1/3. To mix metaphors, this is but the tip of the iceberg of the unraveling of the European economy.

The plunging of Europe into a recession has important implications for the US. Not only does it negatively impact demand for US exports. It starts the European Central Bank on a cycle of interest rate cuts which will put upward pressure on the dollar and further negatively impact the ability of the US to generate economic growth from the sale of exports.

In hindsight, all of this sound and fury about "decoupling" that we were bombarded with last year seems to have been signifying nothing at all. Europe, Asia, and the United States -- not to mention Brazil and Russia -- are all joined at the hip; and the global ship is rapidly taking on water.

As for why the markets in the US keep trying to rally, much of any upward momentum is fueled by the prospect any one of a number of bailouts -- whether it be a huge Obama fiscal stimulus or a possible bailout for Detroit or more money thrown down the Tarp rat hole. What is missing from the public consciousness is any notion of consequences -- a debased currency, eventual inflation, crushingly large budget deficits, the facilitation of large trade imbalances, and so on.

For all these reasons, it is hard for me to get bullish. While (I hope) I will be one of the first to recognize any technical upward market trends that are supported by a change in the fundamentals, that time has not yet arrived. It promises to be a lean Christmas as the economic neutron bomb of our times increasingly quiets our factories and streets. Damn spooky it is, but it least it's easier to find parking spaces.

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