The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

Week Ending February 27, 2009                    Volume14, Number 7               

This Week: Malign Neglect & Santelli for Treasury Secretary

Market Pulse Market Wrap: 10 days ago I raised the spectre of a Dow 6000 on CNBC. Now, we are one third of the way there, and the trend remains down. I continue to advise cash and warn anybody not to get sucked in to the latest Gold Rush. Now, here's what's on my mind:

China Rising AgainThere certainly was a lot to be angry about with respect to the Bush administration. However, one of the biggest things that really ticked me off is something that hardly anybody seemed to notice. This was the malign neglect of the Bush administration with respect to the rise of China. Between 2001 and 2008, China just kicked America's ass in the international marketplace, largely because of China's set of unfair trade practices, most egregiously its massive export subsidies and currency manipulation. Blinded by its own free-market ideology and grandly distracted by events in the Middle East, Bush & Co. almost single-handedly dismantled the American economy and left invulnerable to the mess it is in by ignoring China policy.

Now, my worst fear about the Obama administration is that it also will be grandly distracted by its own financial version of Baghdad and fail to realize that any long-run road to economic prosperity in the United States must travel squarely through a reform of US-China trade relations. To put this argument most simply, America's economy cannot recover over the longer-term without a strong industrial base, and America can't develop a strong industrial base as long as China keeps cheating in the international trade arena.

Exhibit A of this problem and this administration's malign neglect of the China issue is the news of a government-orchestrated consolidation of the Chinese iron and steel industry. This consolidation will make the industrial policy days of Japan, Inc. look like Halcyon days of Adam Smith. I can't tell you what a serious threat this latest manifestation of Chinese protectionism is likely to pose to this country.Over the past six years, the Chinese steel industry has been growing at an unbelievable pace. Any damn fool, except those running the Bush administration, could have seen that coming glut in Chinese steel and the threat that glut would eventually pose to our own industrial base and domestic steel industry. However, my guess is that the Obama administration won't even register this latest China event on its radar screen, distracted as it is by the worsening economy and its own stupid missteps.

And speaking of stupid, White House Press Sec. Robert Gibbs has got to get the award of the week -- and possibly for the year on the stupid front. In a press conference briefing, Gibbs called out CNBC analyst Rick Santelli and accused Santelli of not "understanding" the latest piece of legislative crap from this administration.I've never personally met Santelli, but I can tell you this. Of all the financial market commentators on the air, he is damn well the smartest; and anybody who accuses him of disagreeing with them on the grounds of a lack of understanding of an issue is living on another planet. What the hell does Robert Gibbs know about the financial markets anyway? If that dude had to make his living trading options in the Chicago pits, you would've vanished into thin air long ago.

As for Santelli, he is the only commentator I know that I would trust to manage my portfolio. And one more take on Santelli: I regularly use video clips of him when I teach macroeconomics to MBA students at the University of California-Irvine. I use these clips because they often show the most sophisticated form of analysis -- precisely the kind you need to understand the complex relationships between economic events and financial market movements.

I'm sure that John McCain could not be doing any better as president than Barack Obama. It was clear from the campaign that McCain did not have a very deep grasp of economics. It is extremely troubling however that Obama and his economic team are having such a difficulty getting traction. I for one never thought that Larry Summers walked on water at Harvard. Read his stuff and it is straight out of a Keynesian textbook -- nothing particularly flashy or brilliant.

As for Treasury Secretary Tim Geitner, if you want a really good comparison, go take another look at the movie The Caine Mutiny.   Captain Queeg Geitner is simply too tight when he gets on TV and therefore does not inspire any confidence. Nor do his policies, at least yet.If I had any advice for Barack Obama, I would tell him to quietly arrange a meeting with Martin Feldstein and Rick Santelli. Between the two of them, maybe they could straighten the White House out.Please forward this newsletter to a friend!

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week: Dow 6000?

Market PulseI did an interesting segment on CNBC's "Squawk Box" last Friday about the possibility of the Dow hitting 6000. Below are the notes I made in preparation for that segment. They reflect my concern about the failure of the Obama administration to deliver a well-targeted fiscal stimulus and a coherent bank bailout plan. Juxtaposed against the continued deterioration of the global economic environment, this failure does not bode well for the markets.  To view segment, click here or go to:http://www.cnbc.com/id/15840232?video=1032414845&play=1.DOW 6000 CNBC Talking Points

Intro: Navarro uses a combination of “macro” fundamental analysis and technical analysis to handicap the market direction and trend. Using this approach, Navarro accurately called the top of the stock market in October of 2007 (issuing a call to cash in November 2007). Since that time, he has accurately characterized the market to be first in a downtrend and then in a sideways pattern and urged risk-averse investors to remain in cash.

·         Since rebounding from its low in November of 2008, the US market has been in a sideways trading pattern while the Dow Jones industrial average has held a strong support level at 8000 -- until recently.

·         This technical sideways pattern speaks to an underlying fundamental analysis truth: The failure of the market to establish either a bullish or bearish trend reflects the market's uncertainty about both the severity of the current global downturn and the ability of policymakers to engineer a recovery.

·         Currently, both US policymakers and policymakers around the world are in a race against time: The global economy is deteriorating at an increasing rate. In the thus far vain attempt to stay ahead of this recessionary tide, policymakers are increasing their various fiscal and credit market fixes at an increasing rate. So far, recession is triumphing over Keynesian solutions.

·         Two concerns about the Obama administration's plan now trouble the markets. One concern is that the fiscal stimulus-bailout will be too little too late to stem the recessionary tide. Equally troubling is the concern that the massive size of the policy solution will lead to a debased currency, soaring inflation, and spiking interest rates down the road. Neither scenario doth a bull market make.

·         That the Dow has broken through a critical support level now that both the fiscal stimulus package and the bank bailout are in place is an extremely ominous sign. With that support level broken, the downside risk is substantial.

·         If the global economy continues to deteriorate at the rate it is doing so, a Dow at 6000 has gone from the unthinkable to the quite plausible. Remember: All stock prices reflect is the expectation of the future stream of earnings. If investors now believe the recession is going to be longer and deeper than they believed yesterday, stock prices must resume their downward trend.

·         Watch carefully than to see if the Dow can at least regain its sideways movement. If, alternatively, the Dow resumed its downward trend, 6000 here we come.

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The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

                                      This Week: Overreact, Overthink

Market Pulse

The Obama Administration is overthinking the current recession because, in a panic, its economic team sees no light at the end of the recessionary tunnel. This is despite the fact automatic stabilizers such as falling energy prices, falling home prices, falling interest rates, and diminished wage pressures are already beginning to reinvigorate the economy. Accordingly, the Journal's editorial is correct that the Obama fiscal stimulus package is way overdone. The only fiscal stimuli that should be considered are ones that can get right into the pipeline through the rest of 2009 and ones that stabilize the housing market.

This observation leads naturally to the concern that the Obama administration is likewise overreacting to the credit crisis. This crisis does not require massive loan guarantees, big bad banks, or, the deity help us all, nationalization. Instead, the crisis really requires only one solution: Reducing the rate of home foreclosures. Most of the toxic assets on bank balance sheets represent mortgages gone -- or going -- bad. Focusing singularly on stability in the housing market would go a long way towards restoring these balance sheets and opening back up the credit spigot urgently needed by American business.

Accordingly, it will be exceedingly interesting as to how the bond market reacts first to the fiscal stimulus and then to the Big Bang solution to the credit crisis scheduled to come out this week from the Obama administration. At the long bond dives in price and goes up in yields, that's a big bet that the Big Bang will be highly inflationary.

The Russian Bear Ascendant -- China Under the RadarNow let us shift gears, and allow me to wax semi-eloquent about the tragic consequences of both our media and our new president ignoring foreign affairs as they hyperventilate about the domestic economic situation. For me, this is déjà vu all over again.During the Bush administration, the President never paid any attention to the rise of China and Russia and the fundamental realignment of the global economy because it was obsessed with war in the Middle East. Now, the new administration is clearly distracted by events on the domestic scene even as significant events continue to unfold beyond our borders were the immediate attention.For example, Russia is clearly seeking to do strategic damage while we are distracted. Messrs. Putin and Medvedev wants to put naval and air bases on the shores of the Black Sea in a breakaway Georgian province -- a provocative act if there ever was one. Russia has also successfully managed to bribe government officials of Kyrgyzstan to toss out the US air base in its country. Meanwhile, Russia is trying to form an alliance with the Central Asian republics that would be NATO-like in projecting Russian influence throughout the region.Meanwhile, neither the media or the administration is paying much attention at all to China, which is suffering its worst drought in five years and is grappling with increasing political unrest. At a minimum, the drought is likely to have a sharp effect on food prices down the road while any political unrest in China is likely to spill over by a Chinese behavior on issues like Taiwan.Last take: The unfortunate "Buy America" provision in the fiscal stimulus package obscures very important issues related to the fairness of trade between United States and particularly China. This kind of provision merely provides the supporters of free trade any cost with the opportunity to wave the red flag and bloody shirt of protectionism. How stupid can Congress be? Oh wait, we know the answer to that question. Very.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week: The Big Bang

 Market Pulse

This week, we can all look forward to the "Big Bang." This is the eagerly anticipated range of measures the Obama administration is going to announce to solve the credit crisis and provide relief to homeowners facing foreclosure.

Whether the term "Big Bang" is ultimately going to refer to the creation of a new more healthy financial universe or something done dirtily in the dark to taxpayers remains to be seen. Regardless, I do expect a market rally on the policy news that should be propelled by the financial sector and perhaps even homebuilders.

Watch any Big Bang rally that may materialize very carefully. If the rally holds, it could mark a turning point in the economy by signaling appropriate policies are now in place. However, if my forecast rally fails, we are likely to be in for an exceedingly long haul down the recessionary road.

Readers of this column will know that what worries me the most about the current situation is not the state of the United States economy but rather the basketcase countries of Europe and Asia. In Europe, the troubles in Ireland, Spain, Great Britain, and elsewhere are likely to weigh very heavily on the continent. In Asia, former dragons like Singapore and Taiwan and South Korea are experiencing an unprecedented implosion that makes the 1997-98 Asian financial crisis look like a cakewalk.

My bottom line this week: Day traders and swing traders get ready for some very interesting volatility on the Big Bang news. And look for analysis of the actual policies we wind up with in this newsletter in the coming weeks.

Last take: The failure of the Obama administration to win a single Republican vote in the House of Representatives on its fiscal stimulus bill is reminiscent of the Clinton administration's failure to win Republican support for its tax hike when it took office. That tax bill, of course, set the stage for the Gingrich revolution. This time, Republicans are playing a very dangerous game by refusing to vote in favor of the stimulus. That said, shame on Harry Reid and Nancy Pelosi and Barack Obama for letting that Christmas tree of a bill ever get to the House floor.

On this point, one would do well to remember that the vast majority of members of Congress, particularly the House of Representatives, are far more skilled at raising money from special interests and pressing the flesh than actually doing the people's work. Marginal intelligence coupled with suspect ethics is a lovely recipe for pork bill politics. Memo to the Democratic Party: this is the worst crisis we will have in our lifetime. Please get the fiscal stimulus right. You are off to a very very bad start.

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