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Saturday, August 14, 2010

Weekly Newsletter -- Hedge Your Bets

Market Trend: Sideways

In my last missive of August 6, I posed the question: Can the stock market go up in a slow-growing economy?   So far the answer seems to be “no.”

 

Last week’s multi-day downer broke the upward trend and the only question is whether we will continue downward or settle back into the sideways pattern that has plagued us off and on since October of 09.

 

From an active trader’s perspective, it is critical that you have the discipline to be fully hedged – for every long you must have a short.  If not, you will be periodically gutted – as many bulls were last week.

 

This hedging strategy makes sense as the economy sorts itself out.  The fall last week in the market was driven by a GDP now projected to grow well below the potential output of 3.2%.  In this scenario, high unemployment will remain persistent, the budget will remain in large deficit, and consumption will be weak. 

 

In response to the economic climate, the bond market is hitting record lows for yields.  My “canary in the coal mine” here is my TBT trade – buy it to short the long bond.  With an entry point close to $37, I’m losing in this trade (it’s down close to $34) but it’s a scale in trade so I don’t really have a lot of money on the line.  What the TBT trade does for me is act as a perfect forecasting barometer.  As long as I’m in the red on this trade, I don’t see the economy resuming robust growth or the stock market enjoying a sustained upward bullish move.

 

As for you longer term investors, this market is really going nowhere—and it hasn’t for a full decade.

 

Besides staying on the sidelines in cash as I have been urging, the only other strategy I suggest, albeit one with some significant risk, is small cap biotechs.  Loyal readers know that I always leave about 20% of my portfolio in these ponies.

 

Right now, I’ve got high hopes for Chelsea Therapeutics (CHTP), Cypress Biosciences (CYPB), Neurologix (NRGX), Synta Pharmaceuticals (SNTA), Senesco Technologies, and a stock with a truly scary small float and high spreads but big potential upside Lpath (LPTN).  All of these won’t pop for months and months – and any could drop precipitously if a drug trial goes South.  But upside is high for all.

 

Last take: This will be my last missive until after Labor Day.  So traders, maintain tight stops and sound risk and money management principles.  Don’t expect to get rich in this market on either the short or long side until the economy provides more clarity.  Wish I had better news.

 
1:07 pm edt 

Sunday, August 1, 2010

Weekly Newsletter -- Slow Growth Bull
Stock market trend: Sideways, With Upward Bias Market Pulse 

Can the stock market go up in a slow-growing economy? This is a question not for just this week but likely for the coming decade.   The latest GDP numbers show, as many of the variables in my Always a Winner forecasting model have been suggesting, that the US economy is indeed slowing down and now operating below its full potential output.

 

In particular, the latest numbers show a 2.4% annual growth rate whereas the American economy’s potential output is well over 3%. While corporations have been making money in this slow-growth environment -- and making money is bullish for the stock market -- the abiding bearish question is whether consumers, far too many of whom are unemployed, can spend enough to sustain a recovery.

 

If you think about it, there need not be a straight correlation between corporate profits, GDP growth, and the unemployment rate. Corporations that understand that we are in a slow growth mode can readily adapt to that new reality and continue to turn a handsome profit. Sure, it would be better to have faster growth, but this is hardly a necessary condition for profit-making. From this perspective at least, it is possible to have a bull market in a slow growth economy. But that possibility is not yet a reality.

 

Because traders and investors still are puzzled about whether a Slow Growth Bull is or isn't an oxymoron, the nascent upward bullish trend we have been witnessing still may turn into a sideways pattern once again – or a downward bearish trend if the economy slows further.

 

So what are investors and traders supposed to do in this Slow Growth market? Longer-term investors continue to remain cautious. There is no hurry getting into this market -- despite the hype you might hear various pundits on the tube.

As for shorter-term traders, there is money being a perhaps but only with appropriate hedging. In my own short-term trading, which deploys only about 20% of my cash, I've been trying to run a hedged portfolio with a ratio of about one short for every two longs. What I find really interesting about this trading at this point is how little most of the stocks are moving and, despite the upward market trend, how a number of my shorts are performing rather well. What this pattern tells me is that my description of the stock market trend last week -- sideways, with an upward bias -- continues to be about right. To put this another way, I just don't feel comfortable going along without having some protection on the downside by shorting some stocks.

 

As for what's in my portfolio, you can follow my portfolio selections which appear in my videos for TheStreet.com.

 

My best performers include my longs on Synta Pharmaceuticals, Monsanto, Freeport-McMoRan Copper & Gold, and the Brazilian ETF EWZ. At the same time, my best performers on the short side include my gold short DZZ, BB&T Corporation, and Yahoo. In addition, my best pennystock play has been YRC Worldwide (YRCW), which has been subject to huge volume based on a combination of good earnings news and a likely short squeeze.

 

As for the biggest dog in my portfolio which I will likely soon have to cut, there is JA Solar (JASO). I'm down about 7% on this dogmeat but it was a scale in trade for me so my exposure is very small. (With a scale in trade, you start with a small position so you can take a loss as high as 10% without much damage whereas if the stock does start to run your way, you can add to the position.   

 

***********

Returning to our broad theme of the week, this is what we have come to. While our politicians continue to engage in economic policies that perpetuate slow growth -- higher taxes, more regulation, and an utter lack of fiscal and monetary restraint -- the once mighty US economy has morphed into a tortoise incapable of creating the jobs we need even as the most savvy corporations continue to make money. Does that a bull market make? Only time, and a lot of stress on Wall Street, will tell.

 

Last take: I include an op-ed article that I did for the Orange County Register almost a year ago and why we should get the hell out of Afghanistan. It is even more relevant today as the situation in Poppy Land continues to deteriorate.

 

Orange Grove: Get out of Afghanistan now

By PETER NAVARRO

2009-09-24 17:16:02

During my senior year in high school, in 1966-67, our local congressman came to speak to us soon-to-be-draftees about the necessity of the Vietnam War. His basic pitch was a frothy combination of Red menace, yellow peril, and domino theory. While not particularly versed in geopolitics at the time – although, as a paper boy delivering and regularly reading the Washington Post, I wasn't a complete ignoramus – the speech rang as hollow as a beer keg after a frat party.

 

Today, I get the same kind of hollowness in my gut every time I hear President Barack Obama and a gaggle of Democratic and Republican hawks offer eerily similar arguments for the Afghanistan war. Terrorism is the new Red menace. Yellow peril has morphed into radical Islam. Dominoes, perhaps surprisingly, are still dominoes. In fact, sober analysis of the two major arguments in support of the war leads me to the same conclusion as my gut – let's get the hell out.

 

Consider the first argument: Afghanistan must not be allowed to be a staging area for al-Qaida terrorists. Of course, it was from Afghan soil that Osama bin Laden oversaw the 9/11 attacks so this argument seems at first glance compelling. However, Afghanistan is now just one of many possible staging areas for al-Qaida. In fact, hot zone that Afghanistan is, it is now much easier for al-Qaida's decentralized networks to conduct operations in numerous other places, with Algeria, Somalia, and Yemen emerging as the newest strongholds. Why aren't we invading them?

 

The second pro-war argument is domino theory redux. If the Taliban and Islamic extremists once again control Afghanistan, they will spread their poison to neighboring Pakistan. If the domino Pakistan falls to Islamic extremists, they will inherit Pakistan's nuclear weapons capability and use it to attack Israel and the U.S.

 

This argument fails to acknowledge that America's presence in Afghanistan is inflaming tensions on Pakistan's border and doing more to destabilize the country than protect it. The broader important issue is whether the United States can, or should, baby-sit a country like Pakistan. After all, with its own standing army and a growing middle class, Pakistan should be able to protect its own territory and political and economic institutions.

 

Even if you buy the pro-war arguments, consider this: The war can never be won in any quick or decisive fashion – if at all. As the British learned in two wars with Afghanistan in the 1800s and the Soviets learned in their bloodbath of the 1980s, Afghanistan is no country at all. Rather, it's a diverse collection of primitive tribes occupying a harsh landscape pockmarked with tens of thousands of hiding places ideal for guerrilla warfare. On the quagmire scale, it rates a full 10 and makes Vietnam look like a cakewalk. Why we want to send American sons and daughters into that trap is the question for this age.

 

In fact, our very presence in Afghanistan (and Iraq) is doing more to help al-Qaida recruit new members and develop new military and terror tactics than any other event Osama Bin Laden could have dreamed up. While American troop numbers are constrained by both the size (and battle fatigue) of our military and what American political opinion will bear, al-Qaida has an ever-deepening well of recruits. Why we want to help al-Qaida build its network on the back of anti-American sentiment is a mystery.

 

The saddest fact is that our new president has taken ownership of this war less for strategic and military purposes and more to show his backbone. As a strong and early opponent of the Iraq war, Barack Obama had to protect his dovish flanks during the 2008 campaign by talking tough on Afghanistan. Now, as he gets deeper into the quagmire, the supreme irony is that he doesn't have the backbone to realize this is an unwinnable war without any compelling strategic rationale.

 Navarro on TheStreet.com

I’ve started a daily video column for TheStreet.com that analyzes high volume movers using a Market Edge technical analysis screen.   Click here to review my videos on TheStreet.com.   Or subscribe to the RSS feed for these videos. 

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2:04 pm 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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