Saturday, July 24, 2010
Weekly Newsletter -- A Corner Turned?
This past week was a very encouraging week for
the Bulls as the Dow gained 3% and the NASDAQ 4%. A primary catalyst for the rally was good news from the earnings season.
It seems to be helping, too, that the European crisis is receding while no news from Asia was good news.
What we have here is an
emerging battle between rising corporate profits and continued high employment. The conventional thinking is that if unemployment
remains high, there will not be enough consumer power to sustain a recovery. In reality, I think what we will likely get is
enough consumer spending from the 90% of the people or so who actually have a job to continue to grow the economy, albeit
at levels below potential output. If companies can continue to make money in that scenario, there is a chance that the market
can move upward.
Of course, the much better scenario would be for our policymakers in Washington to understand that the
only way we are going to get back to full employment and produce at full potential output is through a broad-based program
aimed at increasing business investment and exports. This means cutting taxes on investment. It also means trade reform aimed
at restoring our manufacturing base. There is, however, no sign in Washington that our fearful leaders understand this.
This last
week on the Kudlow Report, I did make the case that President Barack Obama needs to emulate President Bill Clinton in the
following sense. When the Newt Gingrich revolution turned Congress Republican in 1994, and when it looked like Bill Clinton
was going to be a one term president, Clinton turned to political consultant Dick Morris who came up with a strategy known
as triangulation. The basic idea of triangulation is for the White House to move towards the middle in its policies -- in
Clinton's case, triangulation meant to run away from the Left in Congress and embrace policies favored by moderate Republicans
like welfare reform and shrinking the size of government.
President Obama would be advised to adopt a similar type of strategy
right now; and he need not wait until he loses the Congress in the November 2010 election. The best way for Obama to proceed
would be for him to adopt a tax cut mindset. If he were to publicly a knowledge the importance of business investment in creating
jobs and follow through with that rhetoric by actually working to restore the Bush tax cuts for investment and capital, he
would begin to win back many of the independents and at least some of the moderate Republicans that help put them into office.
Through such triangulation, he would also do a far better job of creating jobs than he is doing now under the spell of his
Keynesian advisors, particularly Larry Summers, Tim Geithner, and Ben "print me some more money" Bernanke.
And by the
way, Larry Summers has to be one of the most politically tone deaf people in political office the world ever created. The
guy is just offensive -- sometimes mildly so, sometimes over the top. A case in point popped up last week on CNBC. During
an interview with Maria Bartiromo, Larry Summers got in her grill about one of her questions. Two things come into play here:
it was a perfectly fair and innocuous question. Maria Bartiromo is also one of the smartest, fairest, and most polite people
you ever want to be interviewed by. Why would you ever want to offend somebody like that?
Anyway, enough of that digression. My point here
for traders and investors is that the economic outlook remains uncertain, but last week pushed our current sideways market
pattern at least in the direction of an uptrend. In my own trading, which I am discussing on a daily basis in my theStreet.com videos, I am trying to maintain the discipline of entering in to at least some short positions to balance
out my longs.
That said, there is no denying that from a technical analysis point of view, the market seems to be
gathering some strength. As my readers know, I'm a big fan of Market Edge and when the Edge exhibits a pattern in which the
number of new daily upgrades steadily increases, that generally signals a coming uptrend.
As a last take, here are some of the stocks that
I think may have some legs – see my street videos for details.
On the long side, there is Monsanto, Motorola as a smart phone -- android play,
Synta Pharmaceuticals as a value play, Freeport McMoran as a commodities play, the Brazilian ETF EWZ, Halliburton, which was
unduly beaten down by the BP spill, Zhongpin as a Chinese agricultural play, and QUALCOMM as a chips ahoy play.
On
the penny stock front, I also like the beaten down trucker YRC Worldwide (YRCW), which is on the rise after a decent earnings
surprise, and SNT as a long term hold.
On the short side, I'm short the long bond (TBT) and I'm short
gold (DZZ). I think techies Gamestop,Yahoo, Polycom, and Netflix are good shorts along with the BB&T
Corporation.
In this environment, as good as a stock picker as you might be, you have to be even better at money management and
risk management. None of the stocks above with the exception of SNT that I have identified our long-term holds. Rather I see
each merely as a short-term trade that I will exit as soon as that stock’s run is over -- whether it be a few days,
a few months, or a year or more.
Trade well.
1:14 pm edt
Saturday, July 17, 2010
Weekly Newsletter: Whipsaw Part Deux
Stock market trend: Coin flip
Market Pulse
Last week in this missive, I bemoaned that "since last October, we’ve got nothing but a whipsaw
market. Trend looks up. Trend looks down. Repeat.”
Well, the market action that followed certainly reaffirmed this whipsaw pattern. Here is where I think
we stand:
We have had a short-term technical uptick symptomatic of a sideways market pattern.
We have had a sideways market pattern because of uncertainty about the ultimate direction of the economy.
Much
of last week's economic data -- particularly consumer confidence -- raised further doubts about the strength of the recovery
and led to an ugly plunge the markets last Friday.
On the ground, the lack of consumer confidence
is likely hitting the housing market the hardest. After a nice rebound in spring, homebuyers have gone into the woodwork despite
record low mortgage rates.
For my long-term investor readers, I continue to believe that this
is a good time to be mostly in cash. For my short-term trader readers, I think this is a good time to balance your portfolio
with both long and short trades, which is the approach I'm taking. (To follow my stock recommendations for short-term trading,
see my daily video column for the street.com.)
My final take here: I am probably one of the few people who's begun
to build a short position in gold. I use the exchange traded fund DZZ, which is an ultra short fund. On the one hand, I see
gold prices rising as foreign governments increase their share of gold as a portion of their foreign reserves in an era of
sovereign debt around the world. In this way, gold may well become the de facto reserve currency of the world if the Europeans
and Americans fully debased the currency through easy money and excessive fiscal stimuli.
That
said, there is no sign of any inflation so that drives gold prices down. If the economy softens, that likewise drives the
demand for gold as an industrial commodity or retail jewelry down and the price down with it as well. Since I believe that
the net effect right now favors the downside, I'm short gold -- but only with a small position that I intend to build the
trade goes in my direction.
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.
———-
10:47 am edt
Saturday, July 10, 2010
Weekly Newsletter -- Week Ending July 16, 2010
This Week: Whipsaw
Stock market trend: Incipient uptrend
Market
Pulse
Since last October, we’ve got nothing but a whipsaw market. Trend
looks up. Trend looks down. Repeat.
Implicit in this
whipsaw is a sideways pattern where it is VERY difficult to make a buck. Implicit in this whipsaw is continued
uncertainty over the direction and strength of the economy.
Consider these two conflicting
signals. On the one hand, the Dow ends last week up 5.3 percent for its best gain in a year.
On the other hand, global money market funds yielding just half a percent saw a huge surge last week of inflows –
the highest since January 2009 -- as investors built cash hordes in preparation for a possible double dip and bear market.
As for the direction of the economy, here’s what the Financial Times had to say about the
latest uncertainty:
A month
ago, it all seemed to be going so well. Growth in the US economy was picking up. The financial system was, mainly, functioning.
The risk of contagion from Europe had diminished after an unprecedented $139bn bail-out from the European Union and the International Monetary Fund. Things were creeping back towards normality. Then
in early June, as Alan Greenspan, former Federal Reserve chairman, put it, the economy hit “an invisible wall”.
I repeat my question from last week: What’s a trader to do?
Here’s my thinking:
If you are an investor uncomfortable with frequent trading,
stay on the sidelines in cash and wait for this situation to declare itself. If you must deploy some cash,
limit your exposure to 10% of your holdings and limit your positions to small cap biotechs that function outside the business
cycle. I’m holding CHTP,CYPB,SNT,SVNT.
If you are an experienced
trader, favor the long side at this point but only open small positions. The goal is to build positions
if the uptrend is confirmed – or immediately cut losses if the trend fails. Follow my daily video column for TheStreet.com for stock picks.
That said, just about any broad index or sector you look
at now since October of 2009 looks like a sideways pattern. Without tight money management, it is you that
gets skinned, not the other guy.
Last take: My one big macro trade remains a short of the
long bond. With yields at historic lows, upside reward trumps downside risk – absent another Great
Recession. TBT is now at $36 bucks – and the only other time it got that low was in December of 2008
in the midst of the 2007-2009 crisis. So long TBT is a short of the bond market and it is a trade that
I continue to play with – as it is also a canary in the coal mine of any incipient recovery.
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.
1:26 pm edt
Thursday, July 1, 2010
Always a Winner Model Says Head for Hills -- Newsletter Week Ending July 11, 2010
Stock market trend:
Decisively Down
There is no ambiguity left about the direction of this market –
the trend is decisively down. This trend is consistent with all of the leading indicators featured in my
Always a Winner forecasting model: Consumer confidence and housing sales are down. The long end of the yield curve is at historic lows.
The one bright spot – the ISM Manufacturing Index – has now started to turn down.
On
the net export component of the GDP equation, the stronger dollar will catch up to us soon in the form of slower growth.
As for government spending, Congress is finally beginning to turn the spigot off – so that is contractionary
as well.
On the broader macro front, the Chinese real estate bubble appears to be on the verge
of collapse while the Chinese economy is faltering. Europe will be buying less of U.S. and Chinese exports
so that will contribute to the global slowdown. Here in the U.S., voter concerns over the BP “sick
to my stomach” spill, the debacle in Afghanistan, the specter of muni bond failures in key states, continued high unemployment,
job and pension uncertainty, and a congress still intent on passing bad laws and higher taxes all add up
to difficulties ahead.
The danger is not a double dip recession necessarily. All
we need have for a vicious bear market is 1% to 2% GDP growth in the rest of 2010 and all of 2011.That is increasingly likely.
What’s a trader to do? In what may be a kamikaze move, I am slowly building
a position in TBT to short the long bond in the belief that absent a Great Depression, TBT can’t go much lower –
and at some point because of sovereign debt issues, TBT must go higher.
I have also begun
to nibble at the short side for gold. While it has been booming because gold has begun to replace the dollar
as the de facto world reserve currency, gold can’t keep rising when all the other metals and commodities
are falling with a softening economy.
I continue to dabble in several small cap biotechs,
including SNT, CYPB, and NRGX – but beware, NRGX is VERY thinly traded.
On a daily basis,
I’ve also been posting some short term swing trades in videos prepared for TheStreet.com. These trades are strictly for pros, however, as they require sophisticated money management techniques
and move quickly. (Please visit this link on a daily basis to follow these trades.)
I
wish I had better news. Many of my readers are stuck in U.S.-centric long portfolios that are likely to
bleed more over the next 3 to 12 months. That’s why I always say cash is king when the trend is down
– if you are not experienced enough to short (which is far more risky because markets move down a lot faster than they
move up).
12:32 pm edt
Saturday, June 19, 2010
Weekly Newsletter -- Mixed Signals
Stock market trend: Possible Nascent Bullish Uptrend This is another tough week for me. On the one hand,
two of my favorite sources for handicapping the market trend -- Market Edge and Investors Business Daily -- support the existence
of a new bullish uptrend in the market based primarily on technical indicators.
On the other hand, one of my favorite sources
for forecasting the economy -- and thereby easing fundamentals to handicap the market trend -- is flashing increasingly bearish
signals. This is the ECRI Weekly Leading Index which is in a clear decline.
When I put these two disparate pieces of information
together, one likely scenario is a very short run bullish move -- followed promptly by a bearish downtrend once the economic
data kicks in fully. To put this another way, there may be a green light now to engage in some short-term trading with the
uptrend. However, it will be risky business if the ECRI index is correct and the slowdown is coming.
In light of these mixed
signals, I have begun engaging in some very short-term trading on both the long and the short side. My trades have been described
in a series of recent videos for the street.com. I recommend viewing these videos in their entirety, but
some of the stocks I see with some short-term potential include, on the long side, Apple, Halliburton, SanDisk, Cirrus Logic,
and Pfizer. On the short side, I like Gamestop And Research in Motion.
As an update on Prolor (PBTH), my favorite biotech
analyst Andrew Vaino may well have put a fork in this stock by issuing alert that says that the stock may well be done in
terms of justifying its rich valuation. Prolor fell on the news and it will be interesting to see whether it recovers.
8:06 pm edt
Saturday, June 5, 2010
Weekly Newsletter -- IBD Blows It
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: IBD Blows It
Stock market trend: Decisively Broken.
Market Pulse I read IBD’s Big Picture column daily as a way to help assess the trend, and I was astonished
this last week when after Wednesday’s little bull party, IBD called a resumption of the upward market trend.
After thinking
about this, I realized that the problem with IBD is that it basically makes a technical, formulaic call based on past patterns
of elements such as distribution days and rallies on large volume. What it does not do – which is
done is this column – is to also factor into the broader macro fundamentals.
Looking at those fundamentals, you know my story:
I see the slowdown in Europe affecting both Asia and the Americas in a way likely to dampen global recovery. I
see the Obama Administration approaching our economic woes as if more taxes and regulations were the answer rather than true
tax and trade reform. I see no end in sight for an energy policy that leaves us at the mercy of foreign
oil producers – and cowboy companies like BP.
Given this vision, I continue with my cash call – and urge the retail investment community not
to become a cash cow for the rest of Wall Street.
.
11:19 am edt
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
Saturday, April 24, 2010
This Week: Ode to a Grecian TBT Yearn
Stock market trend: Market
in Upward Trend
Market Pulse
Regulators shut down seven
Illinois banks Friday, bringing this year's tally of failed U.S. banks and thrifts to 57. The Federal Deposit Insurance Corp.
found buyers for all of the failed institutions, and the failed banks' branches were all expected to reopen Saturday. All of the failed institutions were included in TheStreet.com's
list of undercapitalized banks. Ten banks in Illinois have failed this year, the most for
any state, followed by Florida with nine -- including three bank failures last week -- and Georgia with seven.
TheStreet.com
As you may
have noticed, I've been off from newsletter duty for a few weeks. It's always tougher around tax season. Plus, I have been
working feverishly to put the finishing touches on a book project I've been collaborating on with a former fellow Harvard
colleague, Glenn Hubbard. The book is scheduled to come out in August, which means that we have to put the manuscript to bed
by mid-May. So again forgive me for the silence.
That said, nothing much has changed from my last missive other than
the market's upward trend has firmed up even a bit more. From a technical analysis point of view, all major indicators appear
to be hitting on all cylinders. Waiting for the "market correction" or market pullback that everyone has been expecting
has been much like Waiting for Godot -- who never comes.
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. In doing so,
I am implicitly calling a bottom in the housing market -- at least as it pertains to coastal California -- and I'm also implicitly
calling a bottom in the mortgage market (if I have indeed correctly hit that bottom, I may wind up being one of the last few
Californians to have gotten a 30-year jumbo fixed mortgage rate under 5%).
As for my trade that is not working for me (yet),
I'm down about 6% on my "short the long bond" TBT gambit. The good news here is that the trade has gone sideways
on me for a very logical macro economic-based reason. To wit: the trouble in Europe with the PIGS -- Portugal, Ireland, Greece,
and Spain -- (particularly Greece) has triggered a flight to quality to the US and bonds have been a major asset of choice.
As the dollar has strengthened and the euro has fallen, bond prices have been bid up, yields have fallen, and TBT has been
a casualty.
The good news here for anyone hanging on to TBT -- or who wants to try this trade -- is that it is difficult to imagine
a scenario where TBT could fall much lower. That would require a very unlikely further fall in long bond yields. So at this
point, entry into this trade gives you much higher upside reward than downside risk. Ergo, I'm hanging on to TBT.
What I'm
not hanging onto for now is my most successful biotech trade of all time – Prolor (PBTH). I nursed the stock for several
years all the way from less than $.50 to close to five bucks and it's time to take my profits. This is not to say I won't
reload. I do see this as a good long-term play. However, right now, a significant retracement looms as a significant possibility
and I don't want to get left holding that bag.
As for my next highly speculative -- and I emphasize the word highly --
biotech stock, I am building a position in Senesco (SNT). It's a development stage company that has applications for both
humans and agriculture. Last week was a good week as it jumped from $.40 to $.60. I'm always leery about
some "pumping and dumping" going on, but this does seem like an interesting stock. Whatever you do, don't buy it
based on what I'm writing here. I repeat, don't buy it because of what I'm writing here. Rather, do some
of your own research and let me know what you think about this. I really would like to gather some more intelligence about
this company.
As a final comment, I put that quote at the beginning of this newsletter about bank failures as a reminder
that we are hardly out of the woods with respect to the credit and financial crisis. The good news about those bank failures,
however, is that there were ready buyers for the failed banks.
1:21 pm edt
Sunday, April 11, 2010
This Week: Big Bets Gone Sideways
Stock market trend: Market
in Upward Trend
Market Pulse The
upward stock market trend remains firmly intact. All major technical indicators are strengthening, thereby lowering the probability
of a correction or pullback. From a fundamental perspective, the macro indicators strongly suggests a resurging American and
global economy. So why do I remain such a skeptic?
It's a good question. I believe the answer lies
in the fact that while all signs point to a cyclical uptrend and possible stock market boom over the next few quarters, many
signs also point to a secular downtrend once we've worked through our cycle of fiscal and monetary stimulus and are left with
the largest public debt hangover in our history. Like a Toyota with a sudden acceleration problem, we seem to be careening
towards an inevitable crash against an ever higher wall of deficits.
What really puzzles me now is the lack of reaction
in the bond market to what must be an eventual wave of inflation as countries around the world monetize their debt. A case
in point is the exchange traded fund TBT, which is an ultra-short for the long bond. While I've been building a position in
TBT thinking that it should soon break out, it's been going in the opposite direction, albeit in very small steps.
This trade
reminds me of the trade I always used to make towards the end of the housing bubble. Every few months or so, when I believed
the bubble must inevitably burst, I would open up options positions on the short side of Centex (one of America's largest
homebuilders). And every few months or so, I would lose a little bit of money. Eventually, that bubble had burst; and when
it did, being on the short side of the housing market was one of the quickest ways to print your own money that the stock
market ever invented.
My point and then is that sometimes there are big macro bets that are "when" trades and not
"if" trades. What I mean by this is that shorting the long bond is not a question of “if bond yields rise”
any more but simply a matter of when the growing mountain of world debt and money catches up with the inflation rate.
My bigger
point then is that if stock market participants are rational and they know that at some point that interest rates are going
to spike sharply and choke off both the economy and the stock market, they should be rational enough not to get sucked in
too far to any short-term bullish upward move of the stock market. The clear danger of being sucked in is being caught in
the market when the trend aggressively turns. So maybe that is one of the big reasons why despite all of bullish signs in
the stock market and economy, the market remains characterized by low volume and small progressive steps rather than any big
breakouts.
If all these ruminations appear to make me a stock market coward, well then so be it. But I do think that most of
the money that's going to be made over the next few years -- and the next few decades -- are going to be on big macro bets.
And the biggest bet of all is going to be shorting the bond market.
These thoughts also lead me to my other big bet,
that on a reevaluation upwards of the Chinese yuan. In this regard, and let me put this in a very delicate manner, I can't
believe how stupid and ball-less the Obama administration is. Throw in naïve while you're at it.
What is the source of
this rant? The fact that our Lilliputian Treasury Secretary Timothy Geithner has cut a deal with the Chinese to allow them
to engage in only the tiniest of revaluations. Memo to Tim: with the yuan undervalued by 30 to 40% or more, at 2% revaluation
by the Chinese will have little or no impact on the ability of manufacturers in America to fairly compete with the mercantilist
Dragon. You sir, are stupid, stupid, stupid, stupid, stupid, stupid, stupid, stupid, and stupid. And ball less, too.
The fact
of the matter is the best jobs program for America is not building a mountain of debt through fiscal and monetary stimulus
but rather engaging in constructive trade reform with China. At the top of the list of such reform, is a fairly valued currency.
Until this is finally and fully understood in the White House and on Capitol Hill, long-term economic prosperity will elude
this great nation.
11:32 am edt
Friday, March 26, 2010
No Mas
Stock market trend: Market in Upward Trend Market Pulse I do not usually go to cash when the market's bullish trend is
still in place. However, this last Friday morning, as the market opened up, I decided that it was time to take a breather.
As I promised I would on the Kudlow Report the evening before, I cashed out for all of my business cycle-sensitive positions
except that in CYB. I even cashed out several of my small-cap biotech stocks, including Chelsea Therapeutics, Halozyme, and
Dusa. I did, however, maintain my large position in Prolor (PBTH) -- the stock had a great week as it went from over-the-counter
to the Amex, which should give it a huge lift over time.
I want to be clear here. I'm not recommending this kind of cash-out
strategy to anyone other than myself. My thinking is this: There is an upward trend in place now. However, the trend is weak
and the risk of a downside move has been steadily increasing as volume has been low. In addition, there has been a lot of
short covering, which hasn't been sufficient to propel market upward. At some point, the shorts are likely to regain the upper
hand.
What I'm seeing, then, is an interval in which the market is once again more of a roulette wheel than a poker game
-- a gamble, rather than an intelligent speculation. In such times, I would rather lose a few percentage points of upside
by staying out of the market than lose as much as 5 to 10% in a pullback or correction. And for the record, I don't mind being
in cash for weeks and months at a time. I prefer to make my money and big chunks rather than small; and to do so, patience
is the most important quality.
In the coming week, we are going to see the end of the quarter where I expect a lot of mutual funds
will be closing out positions to take profits and make themselves look good. That's downward pressure on the market. We've
also got the jobs report at the end of the week -- that's uncertainty for the market. In addition, tax day is coming up and
it is always kind of funky for the market. So my strategy now will be to wait and watch -- at least for a bit.
On the whole,
I favor macro trades. At this point, what I will be watching very closely for is any sign that the long end of the yield curve
starts to resume its upward movement. I continue to think that shorting the long bond is eventually going to be one of the
great trades of this decade. TBT is the instrument. I will be ready to play it, when the inflationary music
begins.
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.
6:51 pm edt
Sunday, March 21, 2010
The Greek Correction Chorus
Stock market trend: Market
in Upward Trend
Market Pulse Seems
like all the talking heads are calling for a market correction. The basis argument is that the market has
moved up plenty, that volume is low, and yes, now that everybody thinks they are a technical analyst, that the market is “overbought.”
I’m
an agnostic on this correction issue. What I know is that an upward trend is in place on a strengthening
– as opposed to a strong -- economy. I also know that this economy remains vulnerable to a number
of shocks, including the Europe morass and a possible negative reaction this week to any passage of Obamacare.
I don’t
know whether the health care bill will pass tonight. I do know that it will be electoral suicide for a
lot of democrats. There is simply not enough to brag about in the bill to make it a “plus”
come November if one votes for its. There is just too much in the bill that is a “negative”
to want that baggage.
I also am tired of having Don Quixote in the White House. First, it was Bush in Iraq
dragging us down. Now it is Obama and health care when, as Bill Clinton once famously said, “it’s
the economy, stupid” we should be focusing on.
And for those of my readers who want health care reform, well me
too. But boy did the Congress go out of its way to screw up this piece of legislation.
12:06 pm edt
Sunday, March 14, 2010
Time to Out Michael Santoli's Mystery Broker
Stock
market trend: Market Resumes Upward Trend
Market Pulse
This week I would like to pick at least a small fight with one of my
favorite columnists, Michael Santoli of Barron's magazine. In his March 15, 2010 column, Santoli used his so-called Mystery
Broker to predict a market pullback in the range of about 10%.
This use of an unnamed second party all seems kind of cheesy to
me. The stock market isn't Watergate and Michael Santoli doesn't need Deep Throat to reveal secrets about its direction. To
Mike, I say if you want to predict what would be a rather significant market correction at this point, then have the chutzpah
to do it yourself -- don't rely on some unnamed ghost whose performance your readers cannot evaluate themselves because he
chooses to go nameless.
As for the prediction of a 10% pullback (actually Mike indicated about 9%), I'm on the other side of
that call for now. The only two technical analysis signs that any type of pullback or profit-taking might be in the offing
include a fairly significant overbought condition for the market (cited by Santoli) and relatively low volume as the market
has ground its way up over the past several weeks.
The problem with relying on an overbought condition signal, however,
is you almost always see such signals when the market achieves new highs and is trying to establish a new leg up on a recovery.
So all that really leaves us with from a technical perspective for the bearish case is low volume. That's a concern -- but
hardly a trend breaker on its own.
Now, on the other side of the technical analysis ledger for this market, what Michael Santoli failed
to mention are these facts: As Market Edge notes, both the momentum and strength indices
for the broad market are positive while sentiment is neutral. Regarding broader market strength, of the 91 industry groups
tracked by Market Edge, fully 83 of them are rated either strong or improving.
My bottom line on my Michael Santoli beef is
that in presenting the case for a pullback, he only told you half of the technical story and used an unnamed cipher to do
it. It's a weak case when you look at the bigger technical picture, which is perhaps why he may have wanted to hide behind
his ghost – if the pullback doesn’t happen, it’s no ding on his reputation.
Of course, loyal readers
know that while I always use technical analysis as a tool to evaluate the market trend, I also only see technical analysis
as a reflection of underlying fundamental conditions. These fundamental conditions currently make at least a decent case for
being cautiously bullish.
The fundamental case begins with the observation that the stock market is a leading indicator of the
economy. The economy of the US appears to be gathering strength right now; and this strength is being driven both by the inventory
cycle fueling business investment in the GDP equation and a sustained and massive government stimulus (both monetary
and fiscal policy). In addition, despite high unemployment and low consumer confidence, consumer spending remains above
expectations. The only big cloud in America's GDP equation picture right now is the net export driver, which is likely to
fall off because of the recent strengthening of the dollar.
For now, then, I see the broad technical strength of the stock
market reflecting optimism about the improving US economy. That means, at least for now, that the upward trend remains intact
and there is little sign of the kind of major pullback that Michael Santoli's Mystery Broker (and Santoli himself by implication)
are predicting.
As for my trading strategy at this current juncture, I'm using a five-pronged approach. I am trend trading
the Russell 2000 with a long position in IWM -- I prefer the Russell 2002 to the S&P 500 because there is more volatility
and potential upside reward. Second, I'm using a sector rotation strategy, with long positions in transportation (IYT), materials
(XLB), and oil (DBO). Third, I am using a geographical diversification strategy, with long positions in Mexico (EWW) on an
improving US economy and Australia (EWA) as a hat trick play on commodities, China, and exchange rates.
My fourth strategy is
my big macro trade of the year. I have a relatively large position in CYB, which is a bet that the Chinese yuan will appreciate
over the next 12 to 24 months. The beauty of this trade is that there is virtually no downside risk because there is no imaginable
scenario in which the yuan would actually depreciate.
Finally, my non-cyclical hedging strategy involves a perennial
commitment of 20% of my portfolio to small-cap biotech stocks, typically under 5 to 10 bucks. I like biotech because stock
prices are driven far more by the drug discovery process than by the business cycle -- ergo, the hedge. I like small-cap biotechs
under 5 to 10 bucks because I can essentially trade them like options and clearly define my losses -- which is critical for
very high risk biotechs. My current holdings include: CHTP, DUSA, HALO, LPTN, PBTH, SNT, SNMX, SCMP, and SVNT.
2:57 pm edt
Saturday, March 6, 2010
This Week: Some Cautious Bull
Stock market trend: Market Resumes Upward Trend
Market
Pulse
Is the economy progressing beyond its policy- and inventory-led surge toward persistent, demand-driven
growth?
-- Dismal Science
Last week's action marks a pivotal point in the stock market cycle. Both improving fundamentals
and technicals have shifted the risk/reward ratio towards the long side while IBD has officially called a resumption of an
upward trend.
Fundamentally, as the above quotation from Dismal Science suggests, we are getting a surge in economic activity both
from a business sector rebuilding inventories and from a massive fiscal and monetary stimulus.
Certainly, it is easy
to see trouble ahead -- a potentially faltering consumer, a Greek tragedy in Europe, and a bubble bursting in China. However,
at this juncture, market participants are discounting these risks and as a forecaster and trader, it would be irresponsible
of me to ignore the market’s collective judgment.
At this juncture, then, what the market is telling us is that the
U.S. remains in the early stages of a recovery and this recovery is likely to continue to expand without significant inflationary
pressures over the next several quarters.
In moving my cash off the sidelines and into the market, I am using
a blend of five strategies that includes sector rotation, geographical diversification, and straight up trend trading combined
with a small cap biotech hedging strategy and a Soros-style macro currency play.
A sector investment strategy at this early stage
of the cycle favors oil, energy, materials, and transportation. I play these with sector ETFs such as DBO, XLE, XLB,
and IYT – all are technically bullish.
Internationally, two of the strongest country ETFs are Australia (EWA)
and Mexico (EWW). I see Australia as a hat trick commodity, currency, and China play. I
believe Mexico will trade well because of the improving U.S. economy.
My favorite broad index play to trade the trend
is the Russell 2000 – symbol IWM. It is the strongest of the major U.S. indices right now from a technical perspective
and has the most volatility.
I might add here that there is a lot of chatter on both CNBC and in the blogosphere about how gold is
a great buy. Commentators point to the massive fiscal stimuli and easy money awash in the world and point to an inevitable
inflation. Some commentators also point to what must be the inevitable decline of the dollar given America's budget and trade
deficits and bloated Federal Reserve balance sheet.
I agree with all that, but good trades are a matter of timing.
So I say stay away from buying gold for now and keep away until either inflationary pressures build or the dollar resumes
its long term decline.
In that same vein, although both sectors are showing bullish signs, stay away from homebuilding and
consumer discretionary spending for just a bit longer to see if the consumer finally declares him or herself into the recovery.
Perhaps surprisingly,
most of Asia remains relatively unattractive for now on a technical basis because of question marks related to the tightening
of Chinese fiscal and monetary policies. So I am avoiding Asia exposure for now, except for Australia.
Finally,
I continue to hold 20% of my portfolio in biotech (CHTP, DUSA, HALO, PBTH, SNMX) and continue to have a big macro bet on the
Chinese yuan appreciating over the next 12 to 24 months. On my biotech holdings, this is the fourth part of my blended strategy
approach to the markets.
In particular, I favor small-cap biotech for two reasons. First, small-cap biotech stocks are driven
far more by the drug trial cycle than the business cycle. This makes such docs a good hedge against business cycle risk.
Second, I
hardly ever buy any small-cap biotech stocks that are more than a few bucks a share. For me, the penny stock biotech stocks
are more like call options without an expiration date in actual stocks because my downside risk is clearly defined and limited.
It will be
interesting to see if my bullish call at this time turns out to be a bunch of bull. If I'm wrong here, we have been set up
for one of the biggest bear traps ever. Given the massive uncertainties out there in the macro world, I wouldn't be surprised
if this trap is sprung -- and I will be ready to try to evade it as much is possible with trailing stop losses. However, for
now, I see the coast as clear.
12:15 pm est
Sunday, February 28, 2010
This Week: Market Sideways, PALM Down
Stock market trend: Market Remains in a Correction
Market Pulse
The big
news last week was the failure of all of the major averages to follow through on the impressive gains recorded the week ending
02/19/10. As noted in last week's Market Letter, all of the major averages with the exception of the DJ Transportation and
the DJ Utility Indexes had broken out of their downward channels. Also, most of the majors had completed a 50% retracement
of their declines from the mid-January 2010 highs to the early February 2010 lows suggesting that a complete retracement back
to the January 2010 highs were in the cards. The negatives in the market out weigh the positives at this time suggesting that
a pull back over the next three to four weeks is a good possibility.”
Market Edge
This
remains a market where it is very difficult to make any solid money in. The sideways pattern and weak technicals reflect the
indecision about market participants about the strength, and ultimate direction, of the economy. Last week's plunging consumer
confidence and abysmal new home sales data reinforce the fear, often articulated in this column, that the consumer may not
follow through on the investment led recovery.
While consumer confidence and new home sales data grabbed the headlines
last week, what caught my eye was the revision to the GDP growth rate. On the surface, a slight upward revision from 5.7%
5.9% seemed bullish. However, the underlying data more clearly indicated that the strength of the recovery is coming from
an increase in business inventories as well as an improved export picture. Meanwhile, both consumer spending and state and
local government spending were revised downward. Here's what that means to a macro geek like me.
GDP growth based on the
inventory cycle is ephemeral. The export picture is likely to turn ugly again as the dollar has bounced because of the European
sovereign debt crisis. Consumer spending is unlikely to step into the breach because of both confidence issues and ongoing
unemployment woes. The fall in state and local government spending is only going to get worse as America's little "Greek
problems" -- the budget woes of states like California, Illinois, Pennsylvania, Ohio, and so on -- will only get worse.
So it should
not be any surprise that a sideways stock market is trying to sort this out. As world fundamentals deteriorate, stock market
technical indicators reflect that. It's not voodoo. It's just logic.
The bottom line here is that in its current sideways
pattern, the stock market is much more like a game of roulette than poker -- a 50-50 gamble rather than an intelligent speculation.
I would laugh out loud at any TV talking head or newspaper columnist who tries to tell you right now that this is a great
time to buy. While anybody says this may turn out to be right, it will only be by luck, not an intelligent reading of the
data and trends.
Accordingly, I am mostly in cash. My one big macro bet remains CYB, which is a bet that the yuan
will appreciate against the dollar over the next year. I like this that because there's virtually no downside risk -- that
is, there is no scenario where the yuan depreciates against the dollar. I also continue to hold a portion
of my portfolio in small-cap biotech stocks like PBTH, CHTP, HALO, and DUSA.
As a final comment, I
set forth the case several months ago for shorting PALM. At the time, I indicated that this would be a long-term play based
on a likely failure of the company's new iPhone wannabee to grab sufficient market share for the company to survive. At that
time, the stock was around $13. The last week or so, it plunged below seven dollars on warnings from the company about its
failure to hit its targets. Unless a buyer swoops in, the stock is likely to go lower. The big problem, however, with such
a weak stock is that it is very difficult to find a broker with which you can short actual shares. That leaves the put option
market and these are getting pricey reflecting the greed of the players and blood in the water.
Navarro on TheStreet.com
Click here to review my videos on TheStreet.com.
———-
11:04 am est
Sunday, February 21, 2010
This Week: The Beatdown Goes On
Stock market trend: Market Remains in a Correction
Market Pulse The
market action in the United States from last week provided some small encouragement that the stock market may be finding a
new floor. That said, there remains significant cross currents buffeting this market which suggests continued caution.
On the bullish
front, it is abundantly clear that the business investment driver in the GDP equation is hitting on all cylinders. The ISM
Manufacturing Index continues to trend strongly upward and the ECRI Weekly Leading Index projects continued expansion. Meanwhile,
the yield curve spread continues to show a steepening yield curve, which typically points to expansion. These are signs of
recovery that should not be ignored by anyone.
That said, on the bearish front, there continue to be problems both in
the three major other elements of the GDP growth equation as well as with issues beyond the United States border.
For example,
consumer confidence remains in a sideways pattern and is anything but bullish while the housing market remains in a funk.
This is important because one of the biggest question marks for long-term recovery is whether or not the consumer will step
in and buy all of the inventory that businesses are now piling onto the shelves. And don't forget, unemployment hovers around
10% while the actual rate of unemployment is probably closer to 15% or higher. That's less wages and less purchasing power
and less growth.
In the government element of the GDP equation, we are seeing a massive expansion of the government sector.
While this may be bullish in the very short run, the rapidly rising debt burden will soon put upward pressure on long-term
interest rates and likely crowd out business investment and hammer hard on me mortgage and housing markets.
Meanwhile,
at the state government spending level, states like California and Ohio are facing insolvency. The likely result will be more
government layoffs, reduced expenditures, and/or higher taxes. Regardless of your ideological orientation, it should be clear
that the overall impact of the state budget crises will be contractionary.
Finally, the Greek tragedy in Europe, which is
causing the euro to fall relative to the dollar, can only hurt US exports to Europe -- with exports being one of the few bright
spots over the last several years in the US growth story.
As for Europe, the prediction I have made is that the euro is not
dead. However, the growth of the euro beyond 16 countries in the European monetary zone is as dead as it can possibly be.
Indeed, there is a high probability that within 12 to 24 months, Greece will bailout of the euro and readopt the Drachma.
The reason: it will be a lot less painless for the Greek economy to recover by selling more exports to its neighbors than
by going on an austerity kick to please Greece's German Masters.
Finally, finally, there is the big bad Chinese menace. China is
desperately trying to control inflationary pressures in its economy, and if it contracts too sharply, that will send a contractionary
ripple effect across Asia which will eventually hit US shores.
On top of this, the Chinese government is increasingly revealing
its dark side to the world with its bullying and its threats to the United States over everything from Taiwan to Tibet and
the Dalai Lama. My own theory here is that Chinese are doing this not out of passion but rather strategy. It is a way of misdirecting
attention away from the number one issue between the US and China, which is China's currency manipulation. At any rate, at
some point I hope the American people and the American government wake up to the fact that the greatest country in the world
should not be in a position where a totalitarian dictatorship can bully us.
My bottom line this week is this: there are many
months in any given year where the stock market trend is clearly defined and you can go either short or long with great confidence
and thereby be an intelligent speculator. These last few months have not been such a time. While last week's market action
provided some glimmer of hope that the market might resume its upward trend, I continue to hold most of my portfolio in cash
amidst a sideways pattern in the market.
My one big macro bet remains CYB, which is a bet that the yuan will appreciate
against the dollar over the next year. I like this that because there's virtually no downside risk -- that is, there is no
scenario where the yuan depreciates against the dollar. I also continue to hold a portion of my portfolio
in small-cap biotech stocks like PBTH, CHTP, HALO, and DUSA.
1:01 pm est
Saturday, February 6, 2010
This Week: Beware of Bullish Pundits
Stock market trend: Market Remains in a Correction
Biotech Alert
Before I present my weekly stock market message below, I want to
alert you to an event coming up this week in New York. It's a big confab between all of the chief executive officers in the
biotech industry -- big and small.
I always keep about 20% of my portfolio in small-cap biotech because the fate of small-cap biotech companies
is largely determined outside the business cycle and instead by the fate of their drug discovery trials.
You may want
to watch my new video that appears at TheStreet.com on how to pick small-cap biotech companies. It features an old friend of this newsletter
in the top biotech analyst in the country Andrew Vaino. Click here to see the video.
Market Pulse
Last week's market action was typical of a stock market in a correction trying to find direction. Big gains at the
beginning of the week rapidly turned into big losses towards the end of the week while Friday was a down and up elevator the
likes of which we haven't seen for a while.
If you agreed with my cash call over the last several weeks, none of this
market volatility would've bothered you in the slightest. The fact is the bullish upward trend set last March has been broken,
the market remains in a correction, and any attempt to go long this market in the hopes of picking up some bargains is simply
a reckless gamble rather than a careful speculation.
In this regard, I urge one and all not to be lulled into the siren
song of TV pundits who want to lure you into this market. Last Friday, as I was getting ready to do a segment for CNBC one
half hour before the market closed, I was astonished to see one of these pundits declaring that Friday's recovery from steep
early day losses had somehow marked the bottom much like the March 2009 bottom. Based on that claim, this commentator was
urging viewers to start running with the bulls again.
If it somehow it turns out that this commentator is correct and
Friday marked the beginning of a new bullish uptrend, it won't be because of astute analysis but rather because it just simple
blind luck. The technical condition of the market is a mess. Three big fundamentals also weigh heavily on the bulls:
First, the
tightening of monetary policy in China coupled with an escalation of increasing trade and geopolitical friction between the
US and China is likely to send contractionary ripples through the Asian supply chain -- from Japan and South Korea to Thailand
and Taiwan.
Second, the sovereign debt crisis in Greece and Spain can end in either one of two ways -- both of them bad.
One way is
through a wave of defaults, in which case a credit crisis in Europe will be triggered, the European already anemic recovery
will stall, and European demand for exports from the United States will fall, softening the US economy.
A second way
Europe's crisis could end would be with a bail out of Greece, Spain, and maybe Portugal by the Euro zone. That would result
in a significant expansion of the European money supply and a plunging euro. That's not good for the US export sector either.
The third
bearish macro wave bearing down on the stock market is this: the Obama administration has clearly crossed a Keynesian Rubicon
with its reappointment of Ben Bernanke of the Federal Reserve, with its support for Tim Geithner as the Treasury Secretary,
and with the continued presence of the ghost of Lord John Maynard Keynes a.k.a. Larry Summers in the White House. From this
Keynesian administration, we are now virtually guaranteed a "tax-and-spend" strategy far more likely to destroy
jobs than create them.
This is not to say there are not some bullish tailwinds we must be mindful of. There is no question
that the manufacturing sector of the US economy is steadily gathering strength. The only question, however, is whether consumers
will eventually come to the party. We've talked a lot about this before -- the consumer is weak. If the consumer stalls, all
that inventory on the shelves of American businesses will turn into more job losses and production cutbacks.
The broader
point is this: why risk your money now when the market trend is so clearly undefined? I know this is a new way of thinking
for some of you buy and hold investors; but this is the way of the new investment world and you better get used to it. The
nice thing about it is that in times of turmoil like last week he won't be running around in a panic or like a chicken with
your head cut off every time the market goes down.
7:29 pm est
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