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Saturday, January 30, 2010

Newsletter -- Week Ending February 5, 2010

Stock market trend: Market in Correction 

Market Pulse

The U.S. markets are in a major correction.  If you see any bubblehead portfolio manager on TV telling you this is a great buying opportunity, know that this man/woman is merely a gambler rather than an intelligent speculator.  For the foreseeable future, the market is a roulette wheel. Until the dust clears – that is, until market participants figure out the direction of the economy -- this is a good time to be in cash (and non-cyclicals like biotech).


I note with some small degree of vindication that the S&P 500 finished last week at the same level as it was when I called a market top in October, 2009.  Perhaps all I really missed was a needle peak that has now evaporated faster than President Obama’s high public opinion rating.


As for why the market has turned bearish, Obama has certainly been doing his part.  This last week he could have truly ushered in some real change on his economic team.  Imagine him announcing that he was replacing his easy money, ultra-Keynesian, babes in the woods triad of Summers-Geithner-Bernanke with the Dream Team of John Taylor at the Federal Reserve, Paul Volcker at Treasury, and Martin Feldstein as top White House economic advisor.  That would have truly turned this country around in one single day.  (Note, by the way, that I didn’t even mention Christina Romer and Jared Bernstein.  These two White House accoutrement are truly Lilliputians at a time when we need Big Bold Thinkers.)


That said, the economic headwinds we face transcend anyone at the helm.  Yes, we had a big GDP number.  But few believe it won’t be revised downward, and even if it is big, it does bring closer the day of reckoning when the Fed must confront its bloated balance sheet and the White House must confront its ballooning deficits.


Sure, the markets could take off again next week despite this gloom.  But the bigger point here for traders and investors is that the bullish trend has been broken and the days of making easy money like March 2009 to June 2009 have been replaced by more cautious times.  Stay tuned.

10:10 am est 

Saturday, January 23, 2010

That is Correct(ion) Sir!

Stock market trend: Market in correction, Watch for bearish downtrend

Market Pulse

 In my previous weekly newsletter, I urged extreme caution in the market until the question of whether the market was at the beginning of a correction had been resolved. This last week, with the American stock market taking its worst set of consecutive losses since bouncing off the March lows, we got our answer. The market is definitely in a correction.  

The next question is whether this will be a brief and mild technical correction or the beginning of a longer term bearish downtrend signaling a dreaded double dip recession. We are going to have to watch this situation very carefully, but the Obama administration is certainly not helping investors now.  

I don't buy into the conventional buzz that President Obama "caused" the markets to drop last week with his latest heavy-handed regulatory initiative to downsize the big banks. That certainly didn't help financial stocks, but this was a market ripe turnover for more fundamental reasons.  

I especially don't buy the argument that the rising probability that Federal Reserve Chairman Ben Bernanke will be fired likewise contributed to the market's downturn. You can certainly make the case that firing Bernanke would be better for Wall Street. Here's why I have been advocating that Bernanke should be fired since last October in this newsletter.  

To the argument that Bernanke helped rescue the financial system at its darkest hour so he should be reappointed, it is important to remember that it was Bernanke's actions that helped get us to that darkest hour. In particular, first as a board member of the Federal Reserve and then as its chairman, Bernanke helped perpetuate the low interest rate environment that fueled the housing bubble which caused the crash. (The analogy that the astute CNBC economist Larry Kudlow uses is: Bernanke should not be credited with fixing the window, because he's the guy that broke it.  

Now here is why Bernanke should be fired. First, he truly and mistakingly believes that the Federal Reserve can save the US economy simply by maintaining ultralow interest rates. All that belief is doing is swelling the Fed's balance sheet and creating conditions for a severe bout of future inflation.  

Second, Bernanke's ultra-easy money policies are debasing the dollar and thereby creating havoc with the global economic recovery. The dollar is falling not just because of the low interest rates per se. Bernanke has also spawned a pernicious carry trade in which speculators borrow dollars at low interest rates and then go invest those dollars globally in commodities and emerging markets.  Moreover, as the dollar falls and drags down the Chinese yuan with it, this dynamic erodes the competitive advantage of countries around the world with respect to both the United States and China and thereby slows down their export growth and economic recovery. It is beggar thy neighbor on a grand scale. 

Finally, Bernanke has sought to turn the Federal Reserve from a central bank entrusted with maintaining a sound currency and economic stability into a regulatory octopus. In doing so, he has undermined the credibility of the Federal Reserve and created an enormous political backlash. The politics of this are particularly interesting. Several months ago when I began my anti-Bernanke campaign, Bernanke merely faced some Republican opposition. Now, with Senators like Barbara Boxer of California and Russ Feingold of Wisconsin jumping the Bernanke ship, his nomination is in deep doubt. This is as it should be. We do not need a Federal Reserve chairman with a 30% approval rating who got us into a mess and whose prime qualification seems to be that he sort of helped us get out of it -- when we're not out of it at all. Enough said. 

In summary, at this point, cautious investors may want to be trimming positions and moving to cash. For those with an appetite for risk, my favorite strategy has been to use TWM, an exchange traded fund for ultra-shorting the Russell 2000 index. To gamble is human, to speculate is divine.

Navarro on TheStreet.com

Click here to review my videos on TheStreet.com.  

Peter Navarro is the author of the best-selling The Coming China Wars, the path-breaking The Well-Timed Strategy, and the investment classic If It's Raining In Brazil, Buy Starbucks. Peter’s latest book is Always a Winner: Managing for Competitive Advantage in an Up and Down Economy.

Peter is a regular CNBC contributor and has been featured on 60 Minutes.  His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University.

Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

11:35 am est 

Sunday, January 17, 2010

Week of Jan 22, 2010: Just a Bad Day or a Bearish Beginning?

Stock market trend: Uptrend Remains Intact

Market Pulse

The stock market finished last Friday on a decidedly bearish note – big drop on heavy volume. The question for this week is whether this was simply an aberration attributable to an options expiration day or the beginning of some kind of market correction.If you take both the economic data and the technical condition of the market at face value, then there is nothing to worry about. The upward trend seems firmly in place, and the evidence continues to suggest an expanding economy -- with the latest such evidence being an uptick in the consumer price index in the ongoing steepening of the yield curve.On the other hand, reputable economists like Mark Zandi and Martin Feldstein are forecasting a double dip recession.  While the slowdown hasn't showed up in the daily yet, these economic bears are looking ahead to an end to help for the mortgage market, continued massive budget deficits, and persistently high unemployment. From that, they tease out a recessionary scenario which would be clearly bearish for the stock market. Here is where I stand on the debate.  I am in the Zandi-Feldstein skeptical camp. As loyal readers will remember, my skepticism dates back to my "market top" call in mid-October. Since that time, the Standard & Poor's 500 index has tacked on an additional 6% to the 61% gain between the March low and mid-October.I continue to ponder whether my market top call was simply premature or just plain wrong. Either way, I don't regret called yet at this point. I'd rather lose 6% on a wrong market top call than give away 10% to 15% quickly in a sharp market correction. That's why, while I made a ton of money like most people between March and September of 2009 in the market, unlike most people, I have grown more and more cautious.My caution is now reached the point where I prefer cash to even dabbling on the short side. Of course, as I said in an earlier missive, I also only enter stock positions if I have a long-short pair that I want to use as a hedge.I know this approach won't have a lot of appeal to a lot of investors. However, my philosophy is to make most of your money in the market in the meat of the move when the trend is clearly defined. Although we have a clearly defined trend now, my view is that the meat of the move is already passed us and any further gains at least over the next few months are likely to be relatively small -- while the risk of a correction steadily increases. This is the kind of macro trading that is the antithesis of the buy-and-hold investor.Haiti Buries Huge China NewsWhile a real earthquake hit Haiti last week, a virtual earthquake with far greater implications for the global economy hit American business enterprises in the form of a massive cyber attack by agents of the Chinese government. Please read the op-ed that follows below carefully. It appeared last Friday in the San Francisco Chronicle.One of the great flaws of the American media is that a tragedy like that of the Haiti earthquake can completely knock a story like the Chinese cyber attack completely off the front pages. I see, however, China's cyber attack on American enterprises as a significant historical event. That's why would ask you read the op-ed carefully below and then forward that op-ed to anybody you can, including your elected representatives. In my book The Coming China Wars, I describe in detail China's strategy to become the world's greatest military and economic superpower at the expense of countries like America and countenance like Europe. These damn well time for working Americans to become as well versed in the matters of China as they are in NASCAR and NFL football. It's also long past time for our myopic, money-grubbing politicians to wake up and understand that the greatest job program we could adopt right now in Congress would be trade reform. 

China's war on the U.S. economy

Peter Navarro,Greg AutryFriday, January 15, 2010China's recent cyberattacks against Google and as many as 33 other U.S. corporations open up a dangerous new industrial espionage front in Beijing's war on American business.China's objective was not that of a rogue hacker - to create chaos. Rather, the target was any intellectual property that would give Chinese enterprises a competitive edge - from trade secrets and new technologies to software such as Google's proprietary source code.Chinese cyberattacks are hardly new. China's military regularly hacks into America's defense networks to acquire military technologies. A glaring case in point: the highly sophisticated penetration last April of the Pentagon's $300 billion Joint Strike Fighter project. Chinese industrial espionage, along with other illegal means to acquire American business technology, is hardly new either. For example, an American manufacturer such as GM or Intel that produces in China must surrender some of its technology. Such forced technology transfer is clearly illegal under World Trade Organization rules, but U.S. executives meekly kowtow for a piece of the action.Similarly, on the industrial espionage front, a shadow network of Chinese visitors to American soil regularly troll for new designs, processes, products and software that can be copied or reverse-engineered. The standard joke: What do they call an American patent in China? A blueprint. More broadly, according to the U.S.-China Economic and Security Review Commission: "China is the most aggressive country conducting espionage against the United States." Of course, once intellectual property is stolen and exported, China gains yet another competitive edge - even as China's economy booms and America's goes bust.What's new and alarming about China's latest wave of cyberattacks is the extension of Beijing's flagrant industrial espionage to cyberspace. If the bank accounts, client lists, trade secrets, patented technologies and proprietary software of American corporations are not safe from Chinese hackers, this becomes an issue not only of economic policy but also of national security. Predictably, Chinese government officials deny any culpability. This is supremely disingenuous, given the tight control of China's Internet by its vast army of cybercops and the sophistication of the attacks.At the dawn of this new cold cyberwar, President Obama and Secretary of State Hillary Rodham Clinton must be clear: Any attack on America - from Pentagon hackings and industrial espionage to forced technology transfer and mercantilist weapons like currency manipulation - represents an act of aggression and will not be tolerated. Peter Navarro is a business professor at UC Irvine and author of "The Coming China Wars." Greg Autry is a UC Irvine graduate student. Contact: www.peternavarro.com. 
7:00 pm est 

Sunday, January 10, 2010

"Always a Winner" Forecast for 2010-Q1

What's the first quarter of 2010 going to look like for the economy and stock market? How can you trade some of the macro trends? In this week's newsletter, I going to answer these questions using my "Always a Winner" forecasting model.

Because I have a lot of graphics in this newsletter, you will have to download the text. It's quick and easy.
Just click here. It's well worth the read.

For a video version of the forecast, you can visit my page at theStreet.com. Click here for that.
1:06 pm est 

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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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