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Monday, May 31, 2010

Reminder: I will be hosting a free webinar on June 8 at noon EST illustrating how to use my Always a Winner framework to improve money management and corporate strategy.  The webinar is sponsored by Soundview, which has identified Always a Winner as one of the top business books of 2010.

This Week: Plan A Is Still In Effect

Stock market trend: Decisively Broken. 

Cash is king in a market still trying to determine whether we are standing on a bottom or trap door.  It’s all about the economic indicators now and whether there will be any signs that the investment-led recovery in the U.S. is going to falter. 

As usual, we may be led by the GDP forecasting equation in my Always a Winner book, where economic growth is driven by only four components: consumption, business investment, government spending and exports. 

Moving through this equation, some regional indicators have begun to point to a slowdown in the investment component.  Consumer confidence (and therefore spending) remain problematic on the basis of high unemployment and stagnant wage growth and downbeat news from Europe to the Gulf of Mexico.  Federal government spending is retracting now on deficit fears and the end of the stimulus while state governments, particularly California, face a new round of cuts.  Finally, while the stronger dollar will help our foreign oil deficit, it will likely be a net downer on the trade deficit as exports suffer.

Meanwhile, Treasury Secretary Tim Geithner came back from Beijing empty-handed on trade reform so China will continue to steal our jobs and erode our manufacturing base through its protectionist and mercantilist practices. 

The only real question is whether the market goes sideways or down for a while now as, absent new economic data confirming robust growth, it’s increasingly hard to imagine a strong upward move. So use this time to build your watch list – and just be ready with your cash the next time opportunity calls. 
11:33 am edt 

Saturday, May 22, 2010

Plan A is in Effect

Stock market trend: Decisively Broken. 

 Market Pulse 

Plan A is in effect for retail investors – remain in cash until the trend reestablishes itself.  The big question now is whether we have “merely” a major correction OR the beginning of a downward bearish trend.


The answer to this question lies in the economic tea leaves.  Will the U.S. recovery start to falter, as some regional data is suggesting?  Will the European economic slowdown and crisis spread to the rest of the world?  Is the 20% drop in the Chinese stock market in the last five weeks a harbinger of a bubble economy bursting or “merely” a Chinese style correction?  Is the drop in long term yields the beginning of a flattening of the yield curve and a signal of trouble ahead?


Since no one really knows the answers to these questions, there is much uncertainty, which is reflected in higher volatility in the financial markets.  Ergo, being in the market now is a roulette-wheel gamble rather than a poker-style speculation.


Remember: The institutional investment managers who go on the tube will tell you that “this is a great buying opportunity.”  They do so because they are stuck on the long side and forced to be in the market by their rules.  Don’t be their patsy.  As they tell you to “buy, buy, buy”, they use your purchases to sell, sell, sell.


The U.S.-China Economic Monologue

 The longest running comedy off-broadway – the U.S.-China Strategic and Economic Dialogue – lifts its curtain once again this week in Red China.  Going back to the days of the Bush Administration, this show features step and fetchit U.S. Treasury Secretaries kowtowing to Chinese officials.   It’s a well worn plot: These earnest men always return with empty hands and empty promises on topics ranging from Chinese currency manipulation to Chinese protectionism of their markets. This week, the Obama Administration is upping the dialogue ante by sending over 200 officials to talk about a wide range of topics.  At the top of the economic list once again there are the topics of currency manipulation and Chinese protectionism.  One particular form of protectionism on the docket will be China’s “indigenous innovation” policy which favors domestic firms and forces foreign companies to surrender their technology as a condition of market entrant. While Hank Paulson did his best impersonation of Neville Chamberlain when he was at Treasury for W., expect Tim Geithner this week to star in the role of American Eunuch.   Mark my words: There will be no meaningful deal on currency reform.  The yuan is 40% under-valued and the best we’ll get is a few percentage points – and likely nothing at all. Mark my words: There will also be no meaningful lifting of China’s Great Wall of Protectionism.  Not with the Chinese economy in crisis and downshifting. The euro crisis has changed everything.  With Europe as China’s biggest export market, China is already getting hammered by the falling euro.  For it to revalue to the dollar – and therefore have the yuan rise even higher relative to the euro – is now a non-starter. What this means is that with the U.S. dollar rising and taking the yuan with it, it will primarily be the U.S. once again getting screwed by the Chinese.  America urgently needs for the dollar-yuan hard peg to be broken so that we can rebalance our trade and revitalize our manufacturing base.  But the Chinese just aren’t going to do it.  Economically, the peg serves their purpose while strategically it further weakens us.   To put this another way, they have us right where they want us and President Obama, Larry Summers, and Timothy Geithner just don’t see it. The best thing to do right now is to put an end to this “dialogue” – it’s just a monologue in which we talk and they don’t listen.  Instead, the U.S. Congress needs to start unilateral action that will prompt Beijing to engage in real bilateral reform.   The lesson of this tawdry repeated summit is that “talk is NOT cheap.”  It’s killing our economy because all we get from Beijing is talk.
1:42 pm edt 

Saturday, May 15, 2010

This Week: Trading on Emotion Eurozone Blues

Stock market trend: Decisively Broken 

 Market Pulse 

Last week, I indicated that the market trend was broken and that the best strategy for a risk-averse retail investor in the absence of a clear upward trend was a move to cash.  So emotionally, just how did you handle that observation when the stock market soared on the following Monday?


If your reaction to that sucker’s rally was: “boy, I wish I’d been in the market and that Navarro is an idiot” then you may not quite understand the underlying macro logic of a cash call in the absence of a definable trend.  At times like these, market participants have no clear consensus view on the future direction of the economy.  Some look at the robust leading economic indicators here in the U.S. and a (slightly) improving job market and are bullish.  Others look at the Eurozone debacle and see a collapse of the global economic recovery and are bearish.


At such times, “playing the market” is like playing roulette.  It’s a 50-50 gamble (less your trading costs) rather than an intelligent speculation.   In such circumstances, you may well experience the “high” of winning for a day such as we had last Monday.  BUT you are just as likely to get hammered – as the market was in the last two trading days of the week.

The broader point here is to get your emotions out of your trading.  If the market has an up day in times such as this when there is no clear market trend, don’t regret sitting on the sidelines.   When the market has several down days, don’t even gloat that you were out of the market.  Just wait and watch for the trend to reestablish itself and then implement whatever stock-picking strategy you have found to be best.


The Euro is Dead


Now let’s switch gears and talk about where the trend is likely to go – up or down – and what the falling euro means:


1.     The euro is likely to continue in a long term decline

2.     The euro will continue to decline because “Le Tarpe” will either lead to a massive boost in the euro money supply OR a collapse of the euro if countries that want to borrow “Le Tarpe” funds refuse to agree to the conditions of accepting the money.  There is NO third option so the euro must fall!

3.     A falling euro will hurt the U.S. economy directly by reducing U.S. exports to Europe.  But this is a small effect since European exports only account for about 2% of the U.S. GDP

4.     A falling euro will indirectly hurt the U.S. economy by reducing the probability that China will revalue its yuan relative to the dollar.  This is the far greater impact because it will mean continued trade deficits with China here in the U.S.

5.     China won’t revalue the yuan at this time because as the dollar is rising, so, too, is the yuan.  This hurts Chinese exports to Europe – its largest market.  Ergo, there is no way China would allow further strengthening of the yuan to the euro by strengthening the yuan relative to the dollar!!!  (If you don’t understand this one, please re-read until you do.  It is the single most important dynamic right now in the global recovery besides the euro collapse itself.)

6.     The decline in the euro boosts gold and silver prices by raising the probability that gold and silver will be de facto “reserve currencies” in a world where high sovereign debt levels in both the U.S. and Europe make the dollar and euro less attractive as reserve currencies over time.

7.     The usual positive correlation between gold vs. oil and commodity prices has been decisively broken by the euro crisis.  A stronger dollar drives down oil and commodity prices BUT a weaker euro boosts gold as a reserve currency play.

8.     It is easier to paint a bearish global scenario from the euro collapse than a bullish one.  The bearish scenario is this: Europe stagnates as “Le Tarpe” fails because of political pressures that were not present in the U.S., i.e., while the U.S. could make demands on Citi and AIG et al, the Eurozone bigwigs can’t bend Greece and Portugal and Spain to their will.  China implodes on a combination of collapsing real estate and stock market bubbles coupled with a fall in exports to the Europe.  The U.S. continues to be leached by Chinese mercantilism while it loses its export growth in Europe while internally states like California and Illinois undertake contractionary measures that ripple across the nation.


Of course, despite this colossal bummer scenario I have presented, the global economy may still recover and the bullish market trend may soon resume.  But to come full circle, why would you want to be fully invested on the long side at this particular point in time?  Unless, of course, you prefer emotional gambling to intelligent speculation.


I leave you with this observation from Market Edge about the technical condition of the market:


The technical condition of the market stayed in a weakened state last week as the CTI and the Momentum Index remained in bearish territory while the Strength Indexes collapsed.  Following the nasty sell-off which occurred the week ending 05/07/10, it came as no surprise to see the market bounce last week. What was somewhat of a shocker was the size of the rebound which saw the DJIA gain 3.9% and the NASDAQ 4.8% on Monday alone. Despite the fact that both the DJIA and the NASDAQ finished the week with a gain, the technical picture continues to point to rough sledding over the next several weeks. … With the negatives far outweighing the positives, the probabilities are high that the correction has a way to go. Typically, sharp declines are followed by a series of failed rally attempts over a 3-4 week period with a valid test of the previous lows needed before a genuine rally can develop. Monday's bounce was a good example of such a bounce.

12:32 pm edt 

Sunday, May 9, 2010

What Just Happened??????

In my last newsletter several weeks ago, I noted a continued bullish trend. However, I also said that:


“Despite the market's bullish trend, I continue to be cashed out of most of the stock market and have shifted a significant chunk of my assets into a new piece of real estate.”


My personal cash call, which went against the grain of the market from a technical perspective, was made on the basis of pure fundamentals. That, in fact, is often the flaw with technical analysis. It misses key market turning points.


Whether this is a turning point and the start of a downward trend or, as many of the talking heads have tried to portray it, simply a 10% market correction remains to be seen. However, the "this is only a market correction" chatter is extremely dangerous. It assumes that the market will simply go down 10 or 15% and then you will have a green light to go back in. Ergo, in this view, with you should be doing now is buying on the dips and accumulating bargains.


From a retail investor’s point of view, this is just plain stupid. The reason this is stupid is that none of these talking heads talking correction have any clue as to why this market is going down. They view the recent dip as a technical correction rather than something more fundamentally wrong.


From a retail investor's point of view, the best thing to do -- and the only thing to do -- right now is to stay out of the market until the trend reestablishes itself. In this regard, I did a very interesting segment last Friday on CNBC that talked about the different incentives facing retail investors versus institutional investors -- and what is implied by those different incentives.


Small retail investors -- and I include people with up to several million dollars in the market -- have the great advantage of being nimble and flexible around market turning points. There's absolutely no reason not to make a move the cash because liquidation of one's complete portfolio can have no impact on market prices. Moreover, small retail investors are not required by any covenants to be committed to the market.


In contrast, consider an institutional investor like a mutual fund. A large, high-growth mutual fund may have extremely large positions in stocks like Intel or Apple or Cisco. If that fund tries to liquidate all of the shares in any of those stocks in a single day, the large liquidation will likely weigh heavily on the price and cost that mutual fund some profit points as he tries to exit. At the same time, many mutual fund managers must cope with the forced requirement of having his or her fund mostly in stock positions rather than on the sidelines in cash.


You should see immediately now from these observations why it is never in the best interests of an institutional fund manager to come television as a commentator and recommend that people sell their stocks. (In the worst-case scenario, you may well have a talking head telling people to buy on the dips and grab great bargains even as that very same fund manager is liquidating positions in those stocks, essentially selling on the rallies he or she helped fuel with "buy on the dips” commentary.)


So to reiterate: if you are a small retail investor, use your flexibility to stay on the sidelines when the market trend is indeterminate or in a downward bearish direction. And be very wary of any advice you hear about "buying on the dips" or going bargain-hunting when the trend is down or undefined.


As for the market trend, here is what I think is going on from a macro point of view. With the yield curve flattening and with the stock market trend broken, the financial markets are casting some significant doubt on the strength of the global economic recovery.


The best way to think about the global economy is as a three-legged stool consisting of Asia, Europe, and the Americas. Right now, and this may seem surprising, the Americas may be the strongest leg of the stool.


Particularly in the United States, we seem to be in the midst of a reasonably good recovery -- although GDP growth rates at this stage of recovery are far below historical norms. Asia, too, has been doing relatively well. That said, there are growing doubts about the Chinese economy, which is coping with significant bubbles in both the stock market and real estate market -- but China at least continues to appear to be booming.


That leaves Europe. The message here is that the real story in the headlines is not about the "Greek debt crisis" but rather about the death of the euro as a reserve currency -- and the likely stagnant economic growth in Europe that may follow for some years.


Right now, the euro zone has 16 countries that have adopted the euro. My prediction is that there will never be a single additional country that will join the euro zone. This is because the recent Greek debt crisis has exposed the folly of any country surrendering both its fiscal and monetary policy in order to join the euro.


The biggest part of that folly is Germany. German sensibilities about fiscal and monetary policy are totally out of tune with the rest of the European continent. In a nutshell, the Germans prefer austerity and export led growth to a reasonable level of consumption and a more balanced economy. Hence, as much of the rest of Europe has gone stagnant -- and wrecked their balance sheets in the process -- Germany runs a huge trade surplus and a relatively small budget deficit. Of course, its leaders want everybody else in Europe to do the same thing -- but the German model only works because of its "beggar thy neighbor” export strategies. So it is all a nonstarter -- and a huge recipe for continued conflict. Memo to the world: there are really good reasons why it has always been Germany that starts world wars in Europe. The Germans are different from everybody else -- and have a low tolerance for the rest of Europe to conform to the German will.


On the euro question, it's not just that no additional countries will be joining the euro zone anytime soon. It's also that some of the countries in the euro zone must eventually leave under the weight of their weak economies and large budget deficits.


In fact, at least some, or perhaps all of the so-called "Piigs” -- Portugal, Italy, Ireland, Greece, and Spain -- will find that the only way for them to restore economic growth will not be through the austerity measures crammed down their throat by the Germans and the IMF. Rather, it will be through currency devaluations that make their exports relatively more competitive. However, such competitive devaluations cannot happen until a country exits the euro and regains its sovereign control over its currency and monetary policy.


So here's the bottom line: no more countries joining the euro and some countries eventually leaving.  Because the financial markets understand that the euro is effectively dead as a reserve currency, it is placing its bets accordingly. Hence, the dramatic fall in the value of the euro against the dollar.


The biggest picture here is that the euro zone faces turmoil for years to come. Much of this turmoil will come from the internal contradictions spawned by the German conundrum. A likely result will be a rate of economic growth lower than it would otherwise be. However, if the European leg of the stool is weak, there will likely be not enough support for global economic recovery over time.


As to why we specifically care about whether Europe is weak -- and whether the euro is weak -- it's all about global trade. A weak Europe buys fewer Asian exports and fewer exports from the Americas. In this way, the two other legs of the stool are hurt.


So to answer the question posed by the title of this newsletter -- what just happened -- it wasn't about a fat finger computer glitch. It was about the recognition by financial markets that something is rotten in Denmark -- and the rest of Europe.


So let me reiterate my bottom line: this is not the time to be buying stocks. Watch the markets carefully and get your buying list ready. But don't jump in with both feet until the trend is reestablished.

11:53 am edt 

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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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