Sunday, December 16, 2012
Navarro's 2013 Forecast
12:46 pm est
Over the past decade, Americans
have had to endure a debilitating "triple-zero economy"—wage growth, jobs growth, and stock-market returns
are all near zero. At least one zero is about to change for the very much better. We are on the verge of a new American bull
market likely to rival that of the 1990s. Even better, this new bull market has next to nothing to do with politics, government,
or last week's election.
I don't make this forecast lightly. For the past five years, I've been a permabear. I started with a call to cash
in November 2007, just before the bottom fell out of global equities. After brief flings with a few bullish rallies, I once
again issued a cash call in February 2011, and I have adhered to that strategy.
Today, however, I see America's next great bull market being driven by
four powerful trends.
• First, the profits—and therefore
the stock prices—of big U.S.-based multinational companies like Apple (ticker: AAPL), Boeing (BA), Caterpillar (CAT), Ford Motor (F), General Motors (GM), and General Electric (GE) are becoming decoupled from the U.S. economy. It's the inevitable result of an ever-increasing share of the profits
of these largely flagless corporations being earned in production and sales offshore, as they open factories and gain market
share in emerging Asian, African, and Latin American markets.
To put this most simply, the Dow Jones Industrial Average and Standard &
Poor's 500 no longer measure U.S. stock markets; they just reflect markets physically located in the U.S. that will rise and
fall, based more and more on events outside our borders.
• As a second macrotrend, coming after a
difficult decade, the vast majority of globalized U.S. companies have adjusted to lower gross-domestic-product growth rates
in the U.S. and Europe by "right-sizing" themselves. Add to this a sustained era of low wage growth in the U.S.,
cheap wages abroad, and little or no inflation, and you have a recipe for sustained corporate profit growth previously thought
impossible. The big corporations will profit, even if the world's two biggest economic engines—the U.S. and Europe—remain
stuck in low gear.
• The third macrotrend underpinning the
next global bull market is the Federal Reserve's quantitative easing. It lowers long-term interest rates through massive Fed
purchases of long-term government bonds. Because the Fed pays for these new bonds by simply printing money, the result is
an ongoing flood of new currency onto world markets; this is positive for equities.
In addition, the U.S.'s quantitative easing also has
sparked imitations from central banks around the world. This is because when the Fed cuts interest rates in the U.S., it lowers
the value of the dollar and makes American exports more competitive. Other countries have responded with their own styles
of printing money and devaluing their currencies, to avoid loss of competitiveness.
The only sensible thing for stock-market investors
to do in this era of quantitative easing is to move out of bonds paying near-zero returns and into equities. Ironically, this
extremely bullish macrotrend is likely to be around for years to come, because QE is likely to be a very ineffective policy
• The fourth bullish macrotrend is the largely
unforeseen energy revolution now underway. Just a few years ago, many analysts were glumly looking at a supposed peak in proven
petroleum reserves, which was colliding with the undeniably rapid growth in energy demand from emerging countries like China
and India. Bearish predictions of long gas lines and a rapid acceleration of energy prices that would cripple long-term global
growth inevitably followed from this gloom-and-doom scenario.
Today, however, the technology-driven development of massive reserves of shale
gas and oil sands holds the prospect of what once was unthinkable—North American energy independence. Even cost-effective
development of arctic hydrocarbon reserves might become feasible. Simply put, we have the makings of another 30 to 50 years
or more of cheap energy and attendant higher growth rates.
OF COURSE, ANY NUMBER of geopolitical flash points
could smother this baby bull in its crib: a nuclear tango in Iran, a territorial clash between Japan and a rapidly militarizing
China, and more rapid spread of Islamic terrorism, just to name a few.
I do not, however, fear that the global economy will soon be shoved off
the U.S.'s fiscal cliff.
With this most bitter of election seasons over, a Republican-led House of Representatives and a Democratic-led Senate
have far more room to move toward the middle of the playing field for a compromise that should put our fiscal house in better
As our politically divided nation heals, a new
bull market should take root. As it does, the disgusted, disinterested, fearful, and cynical retail investors who have been
on the sidelines for so long should come roaring back into the market, producing a bullish trend that should last for years.
Sunday, September 25, 2011
September 2011 Newsletter: The Not So Great Depression, Short China
8:08 pm edt
Since February, I have called the market trend as a sideways pattern.
This kind of trend dictates a move out of equities for the small active retail investors. I reiterate
that call now and see far more risk to the downside than reward to the upside.
I note that anyone
moving to cash as of my February call would have given away no upside profits and would, at this point in time, have been
protected from a more than 10% loss.
I also note that since February, Investor’s Business
Daily has repeatedly missed the market trend, suckering participants into the market with announcements of “an upward
market trend,” only to reverse itself in the face of obvious evidence to the contrary.
I note that the financial press has a strong aversion to cash calls and any urging to “stay out of the market.”
It’s all about the day to day action for the business journalists and pundits – but that won’t make
you a dime unless you are a very active day or swing trader.
At a personal level, I continue to
hold roughly 20% of my portfolio in non-cyclical small cap biotech while – and I don’t recommend this to others
– I have been short the Chinese market using FXP. For reasons I explain below, China’s equity
market offers far more downside risk than upside at this point.
Finally, in what may be my version
of Custer’s last stand, I am scaling into a short of the long bond by buying TBT below $20. This
is an ETF loyal readers will know that has taken its toll on my own portfolio over the last year because I failed to see the
importance of periodic flights to dollar safety from Europe despite the weakening of the dollar. But just
as I kept nibbling at shorting the housing market pre-2008 and kept getting burned, I will continue to short the long bond
as I see an eventual huge gain – just like the housing short.
Here’s an overview of
the foundations of my cash call: The central problem facing global stock markets are major structural imbalances across regions
that prohibit a robust economic expansion that all parties can benefit from. In a nutshell, the U.S. and
Europe still consumer too much and export too little while massive fiscal stimulus is now giving way to a rapid contraction
in government spending. China, for its part, remains far too export-dependent while Japan is simply over
and only South Korea, Thailand, and the Philippines are likely to be resilient enough to prosper over the longer term.
And yes, Vietnam will be the next big growth story in Asia – after the current recession/depression runs its
Now a bit of a closer look:
The United States:
America’s economy is looking increasingly like an economy only capable of generating meager GDP growth rates -- in the
realm of 1% a year rather than the greater than 3% we need to get over 20 million Americans back to work.
Consider that from 1947 to 2000, America’s GDP grew at a rate of 3.5% a year. From
2001 to now, however, we are averaging less than half that!!!!!!!! Yet most politicians and economists
are in denial about this. They think what is happening is a short run cyclical phenomenon and keeps recommending
stimulus – government spending if you are a Dem and tax cuts if you are a Rep. It’s all so
In fact, America’s central problem is the offshoring of the U.S. manufacturing
base which simultaneously depresses domestic investment and boosts the trade deficit. These two drags on
our GDP growth equation account for most of the slow growth we are experiencing.
the face of it, it is remarkable that our President and Congress and members of the financial press don’t want to acknowledge
this drag. However, the reality is that the big multinational corporations like Apple, GE, GM, Caterpillar,
Intel, and so on that benefit the most from offshoring are the same corporations that finance our political elections.
These multinationals also either own our financial media or advertise heavily in the papers and on the networks. So
both the electronic and paper media are reluctant to bite the hands that feed them.
My view is
that is borders on criminal for our politicians and pundits not to acknowledge the importance of trade reform in restoring
American prosperity. By that standard, most of Washington and much of the media should be locked up.
Europe: The euro is about to collapse amidst a sovereign debt crisis likely to lead
to the same kind of meltdown the U.S. experiencing in 2008. I’ve noted this problem for over a year
now – just go back and read previous newsletters -- yet many in our mainstream media seemed surprised the very idea
that the euro is bankrupt and Emperor Europe has not clothes.
Asia (AKA China): China
is on the verge of a housing bubble collapse. A combination of rapidly rising inflation due to an artificially
under-valued yuan and too much government stimulus is about to collide with falling export demand from the U.S. and Europe
as slow growth/recession woes take hold. This is an economic house of cards with enough jokers in the deck
to warrant a short.
To end, I will reprise the analysis I have been offering since February.
So read below and weep – and wonder why you haven’t been hearing this on TV or reading about it in the
Wall Street Journal. It’s so damn obvious it makes me sick.
1. My overriding concern stated more than a
year ago is that our investment-led recovery would not enjoy a follow through because of high unemployment, stagnant
income, continued foreclosures, and high energy prices. That concern has now heightened as I’ve watched the ISM
manufacturing index – the best indicator of the investment led recovery – fall back into the recessionary range.
In addition, consumer confidence is in the toilet. Ergo, this is a BEARISH signal.
With the investment-led recovery faltering, we have no more ammunition from either a fiscal or monetary
policy standpoint to re-stimulate the economy. In fact, it’s just the opposite. We are running high
budget deficits with little stimulative effect – this is largely the product of weak tax revenues due to slower than
potential growth and excess government spending on our wars in Iraq and Afghanistan. On the monetary policy front, Helicopter
Bernanke has turned the king over on the chess board – and is left with only a swollen balance sheet and a weakened
dollar. Another BEARISH signal.
Despite a weak dollar, we still run large trade deficits in oil and with China. With China, the
problem is the fixed peg of the yuan to the dollar. As long as this peg endures, America will surrender almost a point
of GDP growth annually to China at the costs of almost a million jobs we fail to create. This is BEARISH,
too; and if there is anything that truly ticks me off both about well-coifed airheads like those on the Sunday Meet the Press
type shows as well as my doctrinaire colleagues in the financial press it is the stupid and stubborn unwillingness to realize
just how destructive this peg is. Earth to colleagues – you can’t have free trade in a fixed
peg world. It’s the mother of all oxymorons.
It is essential that we not forget the contractionary effects on the U.S. economy of the deepening state
budget crises that have resulted in contractionary cutbacks in state spending. Here in California, for example, revenues
are falling far short of projections; and the state is likely to have to endure another round of what has already been very
steep cuts. From a macro perspective, that’s BEARISH.
Europe’s sovereign debt crisis is deepening. Italy and soon Spain will have joined Greece
and Ireland as the weak sisters on the continent; and all the euros and Eurobonds in the world are not going to save their
sorry derriers. I predicted long ago on the Kudlow Report that the days of the euro are numbered; in truth, the
best way for countries like Greece and Italy to rebound is to abandon the euro and devalue. If the European union persists
in enforcing a strategy of fiscal austerity instead of currency adjustments to restore vibrance in the European economy, they
– and because America depends on exporting to Europe – and us are doomed to a much slower growth rate.
BEARISH, BEARISH, and BEARISH.
6. In Asia, at some point, the Chinese economy
must stop its export-dependent levitation. A soft landing would entail the emergence of a robust consumer but policies
are not being put into place to make this happen – with those policies being a yuan float coupled with increased health
and pension benefits to loosen up savings for consumption. Ergo, the hard landing scenario is more likely. This
involves interest rate hikes and both monetary and fiscal tightening to fight a spiraling inflation. A likely result
will be the collapse of several asset bubbles, including that in real estate – and no small amount of chaos in the land
of unbridled mercantilism. A Dragonianly BEARISH signal
If – or should I say when – China falters, so, too, will the economies of all of the commodity
countries. These include Brazil, Russia, Australia, and Canada, to name the most major players. While Brazil
is the most vibrant of the four, as China goes, so goes these countries. (Canada can fall on both the U.S. and Chinese
weakness of course.) A final BEARISH signal.
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Saturday, August 13, 2011
Newsletter, Week of August 14, 2011 Cash Call, Act III
6:15 pm edt
Always a Winner Strategies
& Stock Market Analysis for the Discerning Investor & Executive
it and Reap!
Week Ending August 14, 2011
Volume 29, Number 6
This Week: Cash Call,
February, I issued a call to cash based on my reading of the fundamentals of the U.S. and global economy. In April,
I reiterated that call; and with this newsletter I continue to see this as a poor time for retail investors to be in the market.
When I issued my cash call in February, the exchange traded fund for the S&P 500 was at 135.
Over the next two months, it would dip as low as 126 and would then rebound to a top of 136, just one point above the level
of when I issued my cash call. Now, at the time of this writing, SPY has fallen to 127.
note without pride that this call has been the most accurate of any analyst on Wall Street in 2011 – yet it has been
largely ignored by my colleagues in the financial media. This is most likely because of a strong bias in
the media towards bullishness. (Of course, that was the same damn bullish bias that allowed people to be
“surprised” by the collapse of the housing bubble in 2007. Yes, I called that bubble collapse
too as early as the later part of 2006.)
In thinking about the movements of the stock market in
2011, it’s important to see the February to June action as a clear sideways market for longer term investors.
Yes, there was some opportunity to trade some volatility and short term rises and dips, but that’s not what I do in
this column. What I do is handicap the market trend based on macro fundamentals and a read of the technical conditions
of the market.
To be clear, from my paradigm, a sideways market indicates disagreement among market
participants over the eventual trend of the economy. It may be that the recent movement down of the market
has ended this sideways pattern and a new downward trend has been established, but I’m not ready to make that call.
In truth, despite all the handwringing and hysteria on the airwaves, we have simply dropped back down to the lower end of
the sideways trading range we’ve been in since I made my cash call.
So what will determine
whether we recede back down into a bear market and recessionary economy or bounce back? Let’s look at the economic
fundamentals that have caused me so much concern since February.
My overriding concern stated more than a year ago is that our investment-led recovery would not enjoy
a follow through because of high unemployment, stagnant income, continued foreclosures, and high energy prices.
That concern has now heightened as I’ve watched the ISM manufacturing index – the best indicator of the investment
led recovery – fall back into the recessionary range. In addition, consumer confidence is in the toilet.
Ergo, this is a BEARISH signal.
2. With the investment-led recovery faltering,
we have no more ammunition from either a fiscal or monetary policy standpoint to re-stimulate the economy. In fact,
it’s just the opposite. We are running high budget deficits with little stimulative effect – this
is largely the product of weak tax revenues due to slower than potential growth and excess government spending on our wars
in Iraq and Afghanistan. On the monetary policy front, Helicopter Bernanke has turned the king over on the chess board
– and is left with only a swollen balance sheet and a weakened dollar. Another BEARISH
3. Despite a weak dollar, we still run large
trade deficits in oil and with China. With China, the problem is the fixed peg of the yuan to the dollar. As long
as this peg endures, America will surrender almost a point of GDP growth annually to China at the costs of almost a million
jobs we fail to create. This is BEARISH, too; and if there is anything that truly ticks me off both about
well-coifed airheads like those on the Sunday Meet the Press type shows as well as my doctrinaire colleagues in the financial
press it is the stupid and stubborn unwillingness to realize just how destructive this peg is. Earth to
colleagues – you can’t have free trade in a fixed peg world. It’s the mother of all oxymorons.
4. It is essential that we not forget the contractionary
effects on the U.S. economy of the deepening state budget crises that have resulted in contractionary cutbacks in state spending.
Here in California, for example, revenues are falling far short of projections; and the state is likely to have to endure
another round of what has already been very steep cuts. From a macro perspective, that’s BEARISH.
5. Europe’s sovereign debt crisis is deepening.
Italy and soon Spain will have joined Greece and Ireland as the weak sisters on the continent; and all the euros and Eurobonds
in the world are not going to save their sorry derriers. I predicted long ago on the Kudlow Report that the days
of the euro are numbered; in truth, the best way for countries like Greece and Italy to rebound is to abandon the euro and
devalue. If the European union persists in enforcing a strategy of fiscal austerity instead of currency adjustments
to restore vibrance in the European economy, they – and because America depends on exporting to Europe – and us
are doomed to a much slower growth rate. BEARISH, BEARISH, and BEARISH.
In Asia, at some point, the Chinese economy must stop its export-dependent levitation. A soft landing
would entail the emergence of a robust consumer but policies are not being put into place to make this happen – with
those policies being a yuan float coupled with increased health and pension benefits to loosen up savings for consumption.
Ergo, the hard landing scenario is more likely. This involves interest rate hikes and both monetary and fiscal tightening
to fight a spiraling inflation. A likely result will be the collapse of several asset bubbles, including that in real
estate – and no small amount of chaos in the land of unbridled mercantilism. A Dragonianly BEARISH signal
7. If – or should I say when –
China falters, so, too, will the economies of all of the commodity countries. These include Brazil, Russia, Australia,
and Canada, to name the most major players. While Brazil is the most vibrant of the four, as China goes, so goes
these countries. (Canada can fall on both the U.S. and Chinese weakness of course.) A final BEARISH
Add this all up, and it is the same damn
picture I saw in February, only worse. I only wonder why this is so damn obvious to me and seemingly so
elusive to so many other analysts. Was not the phrase “it is was it is” invented precisely
for situations just like this.
As a final observation, it’s important to separate the fate
of the U.S. stock market from that of the U.S. economy in at least one sense: All of the components of the Dow and much
of the S&P 500 consist of multinationals that have offshored much of their production to China and elsewhere; and their
revenues are highly dependent on events outside the U.S. So it is possible to have a U.S. stock market that is stronger
than the U.S. economy. That said, that kind of divergence is likely to be an unsustainable equilibrium over time because
the U.S. economy is ultimately too important to global prosperity.
As a final conclusion, the U.S.
economy remains in a structural cul de sac. Consumption and government spending cannot provide the fuel to
run our economic engine anymore. Business investment continues to flee offshore; and our trade deficit is really and
truly a vampire sucking the lifeblood out of our economy.
Until the politicians and Meet the Press
type pundits in Washington and my financial press colleagues realize this, we will continue to have the wrong debate about
what must be done and continue to give the wrong advice to investors.
And by the way, anybody who
was surprised by the events of the last few weeks and the market turmoil needs to turn their press pass back in.
That was, in John Barth’s phrasing, a paradigm of assumed inevitability.
Sunday, May 29, 2011
Weekly Newsletter -- Week Ending June 2, 2011
7:02 pm edt
A loyal reader asked me about TBT – the exchange traded fund
to short the long bond. As you may remember, I was very bullish on TBT last year; but it turned out to
be one of my worst trades.
The best thing to do when a trade goes the wrong way is to learn from it. In
this case, TBT serves a dual function for me – as both a potential trade as well as a leading indicator of the business
fact that TBT took a dive provided a very strong indication to me that the economy was slowing back down and the market would
turn; that was partly the basis of my cash call back in February, which has turned out to be the right call.
Today, TBT remains a
technical sell. Why? The economy is softening. China continues to
buy our bonds to manipulate its currency. QE2 from the Fed is not quite done. That trifecta
keeps interest rates down and therefore TBT down near its 52-week low.
As to why the economy is softening, see last week’s newsletter.
It’s not a particularly pretty picture right.
So I say stay in cash until a bullish market trend reasserts itself.
And watch TBT as a very good leading indicator of any recovery – or Chinese yuan strengthening.
Sunday, May 22, 2011
Newsletter for Week Ending May 27, 2011 Cash Remains King
7:14 pm edt
loyal readers know, I have been on a bit of hiatus working on my new book (with Greg Autry) called Death by China.
(As you may imagine from the title, it’s a barrel of laughs.)
On that note, if you live in the Southern California area, we will have the
book debut on June 7 at UC-Irvine. If you live on the East Coast, the debut will be on June 16 at the Washington
Press Club. (Anybody who would like to attend one of those events, drop me an email and I’ll get
you the details.)
that out of the way, let’s talk some market turkey. As I bit of history, I issued a cash call the
week ending February 25, 2011 and reiterated that call in my last newsletter, which was for the week ending April 1, 2011. At the time of my initial cash call, the Standard & Poor's 500 index as measured by the exchange traded fund SPY was
at $132. As of today, SPY stands at $133. Whoop de do.
You can argue and rightly from short term trader’s perspective that by staying on the sidelines, I gave up
trading a lot of volatility. For example, after my cash call, SPY bottomed at $126 on March 16 and went
up 10 points by April 29. So I suppose you could have made a few bucks there.
But to be clear, short term trading isn’t really my bag. What I try to do is determine the
market trend based on both big picture macro fundamentals and confirming technical indicators – and loyal readers will
know that I have done that with some significant success.
In this case, after
a solid move off the March lows of 2009, I saw the market back in February settling into a longer term sideways (and possible
down) pattern. Here is the macro backdrop that now continues to motivate my cash call:
The fiscal and monetary stimuli in both Europe and the U.S. have largely run their course – and helped stimulate
the investment led recovery we have witnessed. However, that stimuli was not sufficient to bootstrap either
consumers or exports up to the status of follow-through on the investment led recovery. The
bearish factors in the U.S. now include:
· Chronically low consumer confidence supported by stagnant income growth, continued high unemployment, a moribund
The continued offshoring of business
investment to China and elsewhere ·
A squeeze on local and state government
spending because of budget crises
The aforementioned end to the fiscal
and monetary stimuli
Most importantly, the continuation of
the large trade deficit with China that saps our economic strength and zaps our manufacturing base.
In other words, in the U.S., nothing has really changed structurally to breed great optimism.
The bearish factors for Europe include:
· Hey, it’s frigging Europe. Slow growth is the norm.
· The PIIGS remain in trouble, with fiscal austerity measures likely to kick in with
a vengeance in Greece, Portugal, and Ireland.
· The continuation of China’s fixed peg to the U.S. dollar; with a falling dollar,
this is killing Europe, which runs an even bigger trade deficit with China than the U.S. The
bearish factors of Asia include:
The failure of China to structurally
revamp its GDP growth equation to reduce its export dependence and create a more self-sustaining, consumer-led economy.
The folly of China using higher interest
rates and higher reserve requirements to fight inflation rather than allowing the yuan to strengthen. This
is DUMB beyond belief.
The as yet unrealized fact that Japan’s tsunami is proving highly
disruptive to the global supply chain.
Bottom line: If the U.S. and Europe aren’t strong enough to support China’s growth and China’s
consumers aren’t strong enough to buy exports from the U.S. and Europe, it will be difficult for the global economy
see a recession at this point. I do see the same kind of sub-par growth rates in the U.S. and Europe we
witnessed in the last decade and flat market characterized by bursts of optimism.
So I remain in cash – except of course for my various flings with biotech
stocks. Even here, I remain cautious. My one big position now is in Cytokinetics (CYTK). So please don’t shoot the messenger.
I have always made my best money in periods where the trend has been strong – and such periods are getting rarer.
So just be patient; and at some point, I hope I will have better news.
Sunday, March 27, 2011
Cash Call Redux, Hot Biotechs -- Week Ending April 1 2011
12:02 pm edt
Always a Winner Strategies
(Week Ending April 1 Volume
19, No. 2)
In the last
newsletter, I urged a move to cash. At that point, the Standard & Poor's 500 index as measured by the
exchange traded fund SPY was at $132. Since that time, SPY has dropped as low as $126 and closed on Friday at $131. In other
words, the market has done a whole lot of nothing since that cash call – and a few days after my cash call, Investors
Business Daily changed its bullish call to "market in correction."
These are the times that it is really anybody's guess as to whether
the bullish upward trend will reassert itself. On the bullish side, a number of indicators continue to point to a moderate
investment led recovery. On the other hand, a variety of factors suggest trouble with all three of the other elements
of the GDP equation – consumption, government spending, and net exports.
Consumers are plagued by continued high unemployment, weak home
sales, and ongoing foreclosure problems. On top of this, their budgets are being squeezed by higher gas, broader energy, and
food prices. While our Marie Antoinette Federal Reserve does not recognize food and energy inflation as real inflation –
apparently wanting us to eat cake as our bread and gas prices go up – such non-core inflation is likely to have an impact
on consumers moving forward.
the government spending front, the big news here besides the winding down of at least some of the federal stimulus is a coming
contraction in state spending at some of the hardest hit states like Illinois and California. Reduced government spending
– whether it is at the government or state level – is contractionary from a macro perspective so we must anticipate
Finally, on the
net export front, Ben Bernanke's doing his best to trash the dollar and provide United States with a competitive beggar thy
neighbor edge abroad. However, China is doing an even better beggar thy neighbor job with it's protectionist and mercantilist
policies; because the yuan is pegged to the dollar, no matter how low the dollar goes, our trade deficit with China merely
increases. Meanwhile, a weak Europe is unlikely to buy a lot of American exports.
On top of all this, there are geopolitical uncertainties. Will
the Jasmine Revolution spread to more oil-producing pro-American countries like Saudi Arabia? Will the Japanese nuclear disaster
cripple the global supply chain or, worse, morph into a holocaust meltdown? And with nuclear power likely to share a smaller
slice of the electricity generation pie worldwide, will higher electricity prices act as a contractionary force on the world
factors are being sorted out by a market now which is showing surprising strength in the face of high economic uncertainty
and geopolitical turbulence. This is not a market I yet want to play from a trend following perspective and therefore will
continue to stay in cash till the bullish trend firmly reasserts itself. On this note, look for a solid breakout above the
$136 mark for SP Y to confirm a bullish uptrend and stay tuned to this newsletter.
In the meantime, I will continue to do what I always do which
is to keep a significant fraction of my portfolio in noncyclical biotech stocks. Here's a list of some of my holdings.
The newest member of my biotech portfolio
is CYTK, Cytokinetics. This is the latest new listing from Andrew Vaino at Roth Capital, Wall Street's
best biotech analyst. CYTK develops small molecules to improve muscle function for the purpose of treating heart failure and
Lou Gehrig's disease. Its clinical data looks promising, it has a good chance of achieving "orphan drug" status
which helps with regulatory and clinical barriers, Amgen is subsidizing the development costs so it has a great partner, and
the shares appear significantly undervalued. I'm loading up.
I have been doing some short-term trading around Neoprobe (NEOP) with the goal of building a
large position in this stock. I sold off most of my position when made my cash call back in February around four dollars and
started rebuilding as a stock fell down towards three dollars. I like this one for longer-term.
My longest term position is in LPTN, Lpath.
This is a low volume stock with pretty big price swings but I'm just going to hold my position and wait and see how
the clinical trials pan out.
one "Roulette" biotech is the penny play Advaxis (ADXS.PK), a pink sheet stock recommended by one of my readers.
At $.11 a share, it's got little downside risk; and it's the kind of stock that if you get in early and it starts to move,
it’s kind of like trading an option with a big payoff.
Last take: I continue to do some short-term trading in TBT, which shorts the long bond. My intention
is to build a large position in TBT, but events like Portugal debt crisis in the Japanese earthquake can cause TBT to fall
so you have to be careful trading this instrument. Over the long-term, however, I think it will be a home run.
On the book front, my new book (with Greg
Autry) entitled Death by China is now available for presale at Amazon.com and will debut around June 1. Get
your order in early please!
12:01 pm edt
Market Pulse: Cash Call, Cash Cow In the last newsletter, I urged a move to cash.
At that point, the Standard & Poor's 500 index as measured by the exchange traded fund SPY was at $132. Since that
time, SPY has dropped as low as $126 and closed on Friday at $131. In other words, the market has done a whole lot of nothing
since that cash call – and a few days after my cash call, Investors Business Daily changed its bullish call to "market
in correction." These are
the times that it is really anybody's guess as to whether the bullish upward trend will reassert itself. On the bullish side,
a number of indicators continue to point to a moderate investment led recovery. On the other hand, a variety of factors suggest
trouble with all three of the other elements of the GDP equation – consumption, government spending, and net exports.
12:00 pm edt
Tuesday, February 22, 2011
Cash Call -- Head for the HIlls
8:44 pm est
I’m issuing a cash call at this point in time –
while those with more risk tolerance may consider going short.
As noted in my last missive, I’ve been bullish on the market based on an economy improving
at a rate that has been higher than expected. At this point, I don’t see a recession ahead.
However, there are significant storm clouds on the fundamental horizon that suggest a significant market pullback.
The primary argument right now for a continued bull trend is that
the U.S. is a “safe haven” and that investors are “rebalancing” their portfolios to more heavily weight
the U.S. and Western economies versus the emerging markets. I don’t see this as a sustainable proposition
– as one CNBC commentator put it, that makes the U.S. market the “prettiest horse in the glue factory.”
On the bear side, here’s what concerns
me. First, we are already in the middle of a very nasty cost-push inflation squall. On
the food side, we’ve had drought-related wheat shocks in Australia, China, Russia, and the Great Plains area of the
U.S. while livestock herds on down as well. In addition, we are already in the middle of rising energy
costs and with the turbulence in the Middle East, this is unlikely to abate.
Second, the U.S. is entering the next stage of its economic crisis.
This is the fiscal policy shocks that are likely to result as some of America’s largest states face budget crises
and implement cutbacks and tax hikes. Third,
the U.S. budget remains out of control, interest rates are rising, and this is acting as a brake on the housing market recovery.
On top of this, I see a lot of the underlying
bullish trend in the stock market attributable to robust surges in energy and commodity stocks. However,
robustness in these sectors contains the seeds of any market’s destruction because of the underlying supply side shock
implications. In moving to cash, I
know I am going a bit against the grain here as some leading economic indicators continue to point to an above trend recovery.
However, the ECRI Leading Index is losing momentum and I’m trying to anticipate the effects of the post-Mubarak
world we are about to enter into.
in such times, cashing out and sitting on the sidelines a bit is not a bad strategy. While I will maintain
my positions in my small cap biotechs and rare earth stocks, I’m mostly in cash with small shorts on both the Chinese
and U.S. markets.
final comment, in my last missive, I recommended buys on CLDA, EK, and FOLD. While EK fell a few bucks
on a negative legal decision, CLDA gained over 100% and is being acquired by Forest Labs as predicted.
As for FOLD, it’s a long term hold and is doing fine.
to what’s in my portfolio: My biotech longs include: NEOP, LPTN, SBOTF, and SVNT. My two rare earth
plays are GWMGF and GDLNF.
I’m out of TBT for now having taken some profits and will reload on a pullback down to the
$36 range. I’m FXP (which shorts China), long SDS (which ultrashorts the S&P
500), and I’m short a sugar buyer play IPSU. If you have an interesting stock for me to run through my screens, send me an email and I’ll check it out.
Monday, January 17, 2011
Clinical Data, Eastman Kodak, and All That Bull
9:41 pm est
Week Ending January 21, 2011
Volume 19, Number 1
Notice: Because of an impending book deadline, I will continue to
publish this newsletter on a less than weekly basis – likely 1 to 2 times a month for the next several months. I apologize
for this, but promise to send my subscribers alerts when ever anything really important is in play.
This Week: All That BullMarket
The good news as
2011 rolls along is that the economy is looking far better than it did six months ago. This helps account
for the undeniable bullish uptrend of the U.S. market. As this point, trading with the trend means being
on the long side for the foreseeable future.
I can offer three interesting stocks I’ve taken significant positions in, two of which will likely have sharp
moves up (or down) within the next week.
first is Clinical Data (CLDA). It has an important date with the FDA for the approval of its anti-depressant
drug Vilazodone on January 22. Roth Capital analyst Andrew Vaino handicaps the probability of approval
at 75% and if all goes well, this is a $15 stock that should jump anywhere from 50% to 75%.
What’s good about Vilazodone is that it would be the only anti-depressant
that doesn’t interfere with sex drive – not a bad niche in a market weighed down heavily by that side effect.
But even if Vilazodone gets approval, CLDA will still likely have to find a buyer among Big Pharma to really see a
sustained stock price hike.
cautious about this one because the short interest, though falling, remains high and that often means somebody knows something
that isn’t fully disclosed yet. That said, I’m significantly long this stock.
The second stock of interest is Eastman Kodak (EK).
This is a five buck stock with strong buy technical signals from Market Edge that has an upcoming January 24 court
decision on alleged EK patent infringements by Apple and Research in Motion. A favorable ruling would goose
the stock. But even in the absence of the ruling, EK seems to be coming out of the Stone Age of film into
a digital world with some nice products across lines that exhibit some of the technological innovation Eastman Kodak used
to be famous for. Plus, EK has some other patents that it might be able to extract some royalties out of
from companies like Facebook. So I’m long this one as well.
The final stock I’ve taken a significant position in is FOLD –
Amicus Therapeutics. It’s a small biotech with a drug in progress, Amigal, that treats a rare enzyme
deficiency disease known as Fabry’s disease. It’s got a deal with GlaxoSmithKline to develop
and commercialize Amigal, it has a strong cash position, and it’s already made a nice little move since Roth Capital
initiated coverage on it.
As for an update on some of my holds: Stellar (SBOTF) is a favorite long term hold – I like the promise of
its technology. TBT, shorting the long bond, is another one of my long term holds that I hope to pay for my kid’s college
At any rate, that’s all
the news that fits for now. Bon chance.
DISCLAIMER: There are often typos in this newsletter and the culprit
has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but
some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own
Saturday, December 4, 2010
8:48 pm est
In the last newsletter, I indicated that I was cashing out many of my positions and taking profits “in
anticipation of a flat to down US market until the end of December. I have continued with this process
and not been particularly disappointed. While Investors Business Daily declared last week that the upward trend of
the market has resumed, I still see it in a largely sideways pattern. Since October 25, the S&P 500 index, as measured
by the exchange traded fund SPY, has gone from about 118 to 122 back down to 118 and back up to a little more than 122.
BFD. It's just not worth the risk to be in the market.
Despite some false
optimism about the strength of the US recovery, the latest jobs report brought everyone back to earth. Despite a short-term
improvement in the European crisis, the long term suggests many troubles ahead for Spain, Portugal, and Italy while the euro
zone itself is more likely to shrink than expand. China continues to boom, but the Chinese central bank continues to raise
interest rates. If we've learned anything from the rational non-exuberance of Alan Greenspan here in the US, it is that rising
interest rates will invariably choke off any recovery. It would be high irony if China underwent the same kind of housing
bubble collapse that the West did – it would likely make what happened in the West look like a stiff breeze compared
to a hurricane.
My bottom line is that this is one of those times where it is just very difficult
to make money. In such times, Wall Street looks more to me like a roulette wheel than a poker table. During such times, I
do not like to sit down and play as the House, e.g., program traders, hedge funds, and the like, typically has the advantage.
I have the luxury of doing sitting on cash because, unlike professional money managers who are under constant pressure to
continually deploy their capital, I only have to play when I want to. From this vantage point, it's not worth the few percentage
points you might gain going into the New Year at the risk of losing substantially more. To put this another way, I prefer
to make my money in bunches when the market trend is solid rather than get nicked and cut in any sideways markets.
Navarro's Trading Summary
The little money I do have in play
right now remains primarily in some of my small cap biotech favorites. So far, my best trade has been Stellar Biotech.
I got in at around $.40 and after a brief pullback, it's back over a buck. I see this as a long-term play so please
don't pump this one on my behalf and then dump it. Do your research, see that it has a reasonable business strategy, and make
your own decisions.
As for some other trading highlights, I took profits on my yen short and my
long on IMAX, bailing on IMAX because of some concerns raised about their accounting practices that are likely overblown but
still capable of battering the stock. I also took some profits in TBT and then promptly reloaded a small position as it fell
during this latest European crisis. I will add to this position if either it's swoons once again or develops a strong support
level and begins to rise. I am also maintaining a small position in Beazer homes simply because I like it as a canary in the
coal mine, a position that will alert me to any recovery in the housing market – a key ingredient of any broader economic
Lastly, I remain underwater with most of my rare earths positions, but these are small
positions and I will hold them to see if this market develops.
Have a great Christmas and Hanukkah!
Unless there are important market moving events, I will see you in the New Year.
are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally
Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't look
quite right, trust the syntax and make your own internal correction.
Sunday, November 21, 2010
This Week: Red China Rolling Over?
11:42 am est
Stock market trend: Up
I have begun to cash out of many of my positions and take profits in anticipation
of a flat to down US market until the end of December. Both tax selling and the taking of profits coupled with uncertain outlooks
in communist China and in the PIGG portion of Europe suggest less upside reward than an undeniably strong technical market
trend might suggest at this point. Better to be early than late is my motto.
of early,I have begun to build a short position in the communist Chinese stock market using the exchange traded fund FXP.
Just as I was a bit too early shorting the housing bubble, I may indeed be a bit early on the China bubble. However, here
is what I'm seeing.
First, as my early warning system, I maintain a watch list of 64 Chinese
stocks listed on Market Edge. Over the past month, I've noticed a systematic deterioration in many of the stocks. 23 show
deteriorating conditions while only six show improving conditions. Of the six with improving conditions, three of them are
Second, from a fundamental perspective, economists within the Communist
Party have come to a critical inflationary fork in the road. One fork – the path of contractionary monetary policy,
rising interest rates, and price controls – leads inevitably to a business cycle downturn. The other fork – allowing
the Chinese currency to strengthen so as to reduce the price of food, commodities, energy, raw materials, and imported consumer
and investment goods – leads to a far more stable transition to an economy less dependent on exports.
is crystal clear that the Communist Party has chosen the wrong fork. The biggest danger of traveling along the rising interest
rate path is to prick the speculative bubble otherwise known as real estate in China – all the while attracting a flood
of speculative hot money flows.
The bigger picture is that communist China cannot continue
to experience export led growth catalyzed by American and European consumers. The American and European economies simply don't
have the firepower to sustain communist China's growth.
The last thing I should say about
investing in China is that it is far better to play the long side of the communist Chinese market by investing in peripheral
plays like Australia, which provides China with many of its commodities, and Germany which provides China with many of its
capital goods. However, the main reason I don't like investing in communist Chinese stocks (besides the fact that it is a
ruthlessly totalitarian country whose political and military leaders are out to destroy America) is that the vast majority
of Chinese companies put creating jobs ahead of making money. That doth not a robust return make.
With the big macro picture out of the way, let's finish with a brief
discussion of my trading strategies. The last letter I strongly recommended going long the yuan via CYB, short the long bond
via TBT, and short the Japanese yen, YCS.
The TBT trade turned out the best –
it went up six points, and I've taken my profits for now while I wait for the Irish crisis to subside. As I painfully learned
during the last European crisis, a flight to the US dollar pushes down bond prices and boost yields – which is exactly
the opposite direction TBT plays it.
I'm also making some modest money on my yen short while
I continue continue to hold CYB while I wait, perhaps like Godot, for that bright shiny day when the Communist Party figures
out it is in China's best interest to let the yuan go up significantly.
In terms of the rest
of my portfolio, I added two stocks to my short-term trading portfolio based solely on an interesting discussion in one of
my MBA classes. The stocks are Imax (IMAX) and Clicksoftware (CKSW). Just be careful with Clicksoftware because it has a small
In my short-term trading portfolio, I also bailed on COIN, which was a failed play
on California's failed marijuana initiative and abandoned ship on DirecTV based on growing information that the Internet is
becoming more and more of a substitute for cable than simply DirecTV.
My favorite little penny
play and best performer continues to be Stellar Biotech (SBOTF). Profit takers hit the stock fairly heavily for a couple of
weeks but it's back trying to inch above a buck. This is a stock to accumulate and forget about for a few years and then likely
be very happily surprised.
Since I got into the rare earth bonanza a bit
late, my small positions in several stocks continue to be flat to down. I reiterate that this is a long-term
building project. My small positions include ARAFF, GDLNF,GWMGF, and LYSCF.
my dumb move of the fall quarter is opening up a small position in the uranium stock URZ recommended by a stock site called
Ahead of the Herd – I promptly wound up significantly underwater. I still can't figure out whether I have been "pumped
and dumped" or whether the site simply made a bad call. If anybody has any information about this stock site, send me
an e-mail and let me know whether it has helped you make money or lost money.
a great Thanksgiving! And as the ultimate expression of patriotism, go out and buy a bunch of cheap Chinese stuff on Black
Friday to put around your Christmas tree. LOL
There are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon
Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't
look quite right, trust the syntax and make your own internal correction.
Sunday, October 31, 2010
1:42 pm edt
market remains in an uptrend but it is a “weak dollar” rally, not a “strong economy” rally.
In real, dollar-adjusted terms, the market is closer to flat. A possible crash triggered by the weakening economy or
a currency war is not out of the question. Don’t fight the trend – but I’m certainly
not jumping in on the long side with both feet either.
China’s recent interest rate
hike and Fed Chief Ben Bernanke’s recent QE2 interest rate cut put us on a collision course. You simply can't have one
country lowering interest rates in another country raising interest rates when the two currencies are held together by a fixed
peg. Something has to give, and I think perhaps that Ben Bernanke is trying to force the Chinese to revalue the yuan because
the Fed chairman knows that the White House and Congress don't have the backbone to do it – and the Fed chairman also
knows that reducing the global imbalances between China and the US is critical to long-term recovery.
an investor's point of view, I see three related macroplays: Long the yuan via CYB, short the long bond via TBT, and short
the Japanese yen, YCS. (I have all three positions)
The yuan MUST eventually rise and
can’t go down so CYB is very low risk. Once the yuan starts to rise, long bond yields must
rise because the Chinese. Buying as many treasuries as they do now. This will cause a spike in TBT. The
yen is grossly over-valued because the yuan is grossly undervalued – it must fall once the yuan starts
I continue to allocate 20% or more of my portfolio to small cap, discovery stage
biotechs outside the cycle. I said to get into SVNT prior to an FDA ruling that would lead to a 75% pop.
I said to sell SV is NT after the pop because it might be hard to get a buyer for the company. Now that SVNT has fallen
dramatically because of a failure to find a buyer, I think it is a buy again and has at least a 25% upside. (I bought on drop).
Right now, my favorite little penny play and best performer is Stellar Biotech (SBOTF) –
it has almost doubled since I first noted it in the newsletter. (Check my previous newsletters for more
detail.) I've also begun to build a position in Direct TV as a long term secular
play as satellites spring up all over.
My other highly risky penny play that is making a very
nice move on low volume is LPTN. If it breaches a buck, it should start to run nicely.
Since I got into the rare earth bonanza a bit late, my small positions in several stocks are flat
to down; but I'm not really worried because this is a long-term building project. So far, I have opened small positions in
ARAFF, GDLNF,GWMGF, and LYSCF. Only GWMGF is up. (As previously noted, I purposely stayed away from Molycorp
as it is way too expensive.)
I sold Hovanian for a small
loss and reloaded with Beazer, which has better technicals – so that's my play on the housing sector, which I think
is at a bottom.
I dumped him my shares in DUSA, MDVN, and TEVA not because
I have lost faith in it but simply because I wanted to deploy my cash elsewhere and I didn't see much upside in the near-term.
I also closed my position in QTWW on news that it was going to undergo a reverse
stock split. I just hate that crap, and reverse stock splits invariably reduce a stock’s price.
I closed my short position in GameStop with a very nice little profit -- with the market trend
robustly up, just don't want to be short now.
I also opened a position in
a penny stock called Converted Organics (COIN). It's got excellent technicals and came up on my Market Edge screen. It's a
good long-term play on agriculture.
Stocks that I am long:
Saturday, October 16, 2010
TBT Rising & Beggar Thy Neighbor Ben
Here's the lowdown on last week's action from Marketedge: “Stocks continued to march higher last week as both the DJIA and the NASDAQ posted modest
gains for the period.… The technical condition of the market was mixed last week as the CTI lost a couple of points,
there was considerable deterioration in the Strength Indexes but the Momentum Index remained strong."
6:04 pm edt
Translation: The upward trend remains intact but
there's some disquieting underlying technical deterioration that we must take note of.
On the fundamental front, virtually all economic leading indicators are pointing
towards a slow growth scenario over the next 12 months, in the range of 2% real GDP growth, which is significantly below our
potential output of about 3% to 3.5%. If this forecast holds true, unemployment will remain high, income will remain stagnant,
and it is unlikely that consumption will help pull the economy up to full and steady growth.
As for why the stock market is rallying on this lukewarm news, the most
likely scenario here is that the market’s upward trend is more an illusion than reality once one discounts for the rapid,
recent decline in the dollar.
It's a salacious
little menage a trios we have goin gon: The Federal Reserve keeps short-term interest rates low and engages in quantitative
easing to lower long-term interest rates and thereby turns on the monetary printing press. The increase in the money supply
drives down the value of the dollar. Meanwhile, the Smart Money borrows money at low interest rates and buys stocks, with
a heavy skew towards energy and commodity-based stocks which will hold their value through price appreciation as the dollar
In other words, pierce this veil
and you see that there's nothing really going on fundamentally to suggest a strengthening economy. Rather, it is more a house
of mirrors from the Federal Reserve.
that note, I used to think that Ben Bernanke was a very smart guy doing a very dumb thing by printing endless reams of money
at the Federal Reserve. Maybe he is just Machiavelli. Could this latest move with QE2 and a cheapening of the dollar simply
be Beggar Thy Neighbor Ben’s way of stimulating our economy via exports and putting more pressure on the Chinese to
let their currency float? Smart or dumb, Ben Bernanke is playing a very risky game.
So what does all this mean for traders and investors?
For traders, there remain opportunities for short-term trading with the upward bullish trend – but be careful, as the
technical indicators are suggesting softening. For investors, despite the upward trend of the market,
I remain nervous about fully deploying cash into this market.
Finally, I have to talk (brag?) a little bit about TBT. After lamenting several weeks ago that this
has been one of my worst trades – so far – I also indicated that I wasn't really worried about being in the red
and that I had adopted a modified "double down" strategy that has involved adding to the position every time TBT
(which shorts the long bond) went down.
week, that strategy finally paid off as TBT made a nice upward move and put the trade back into the green. The move was all
the more amazing in the light of repeated announcements by the Federal Reserve that it would engage in more quantitative easing,
which should push long-term bond yields down and prices up and further push TBT down. However, that didn't happen, and the
reason I think goes back to the issue of the impact of a falling dollar on the inflation rate and an eventual bursting of
the current bond market bubble. So I continue to like the TBT trade. Let's see where it goes.
I opened new positions in several rare earth stocks based on China's
export restrictions on its supply – China is the OPEC of rare earths. (See my video about this at TheStreet.com.) This is strictly very high risk, penny stock stuff; and I run the
risk of buying late in the run so I am only buying small positions and will only add them as the trade moves in my favor.
So far, I have opened small positions in ARAFF, GWMGF, and LYSCF. (I purposely stayed away from Molycorp as it is way too
expensive.) (If any readers have any thoughts on the rare earths stock plays, I'd love to hear from you.)
I also opened up a new position in FEED based simply
on technical considerations – this is an agricultural play in China.
Stocks that I am long:
Stocks I am short: GME.
Updates: I cashed out both DEPO and SNTA with very nice gains -- no
news in the nearer midterm future to propel them much higher. I took a small loss in SOMX – a bad
trade where i got sucked into a parabolic move. I also significantly trimmed my very
large position in SNT – I still have faith in it but will only add back to this position as it moves up, which looks
like it will take a long while.
I haven't mentioned previously my long position in DTV. This is kind of like a "Peter Lynch" play – the famous
mutual fund manager who used to get his ideas from talking to his children about what they saw at the mall. I'm just seeing
a lot of satellite dishes going up.
DISCLAIMER: There are often typos in this newsletter and the culprit has to do
with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is quite high, but some silly
things do slip through. So if you see something that doesn't look quite right, trust the syntax and make your own internal
Sunday, October 10, 2010
Fareed Zakaria Floats Away -- Weekly Newsletter
Stock market trend: Up
1:19 pm edt
good news: The US market indices continue their upward trend last week as the Dow Jones industrial average broke above the
11,000 mark for the first time in over five months. The bad news: this latest market uptrend appears not to be driven by good
economic news but rather by an emerging "carry trade" driven by the easy money policies of the US and a number of
other countries around the world, including Japan.
The carry trade game here is simply to borrow
money from the Federal Reserve or Bank of Japan via low interest rates and invest in the stock market. In this carry trade,
the dollar falls and the US markets go up but the net effect in real, dollar adjusted terms is negligible.
this perspective, any price appreciation in the stock market is merely offsetting negative currency effects. This is hardly
a bullish scenario. That's why while this may be a good market for short-term traders, it is a dangerous one for longer-term
investors tempted to move cash off the sidelines.
What bugs me about all this is a Wall Street "patriotism"
that equates the debasement of the currency and easy money with something it must be good for the country because it's good
for the markets. What a crock.
All of this will continue until countries around the world confront
China on its mercantilist and protectionist trade policies. China's grossly undervalued and manipulated currency alone is
driving the monetary policy not just of the United States but also most of the countries in Asia. A weak Chinese yuan forces
Japan, South Korea, Taiwan, and all of China's major competitors in Asia to try to drive their currencies down. Meanwhile,
the commodity countries like Brazil and Australia are going bonkers because their currencies are bearing the lion's share
of the burden of China's beggar thy neighbor currency regime through currency appreciations of their own – and result
in export difficulties.
What I find really irritating as well is the rush of American journalists
– Exhibit A is Fareed Zakaria's mindless apology for China in this week's Time magazine – to support Chinese mercantilism
and protectionism. It's not even blind ideology on Zakaria’s part. It's just plain arrogance and stupidity. If you get
on enough TV shows and get asked your opinion enough, you start to believe you actually know something. My guess, however,
is that when the light weight Zakaria is on any TV set, they have to nail his shoes to the floor so he won't float away.
Anyway, that's my rant for the week and I'm sticking to it. The sober analysis is that this is an
upward trending market with a wall of worry that is primarily macro-based. Climb it with caution.
that I am holding: SNTA, DEPO,DUSA,LPTN,NRGX,QTWW,SVMI,SNT,SBOTF,CYB,TBT,MITI,
Updates: I cashed out the rest of my Chelsea – will reload if it dips below $5.
I took a small loss in YRCW, which did a reverse stock split and wiped out all the fun speculation on a penny stock.
I will add to TBT every time it drops a buck.
As a final note, there are often typos in
this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy
rate is quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the
syntax and make your own internal correction.<a
href=”http://affiliates.wallstreetsurvivor.com/z/228/CD302/"> Try our Free Stock Market Game at WallStreetSurvivor.com.</a>
Saturday, October 2, 2010
Bernanke Bond Put -- Weekly Newsletter
Market Trend: Up
8:47 pm edt
According to Market Edge: “After four weeks of impressive gains, stocks took a breather last
week as both the DJIA and the NASDAQ ended the period with minor losses. The DJIA started the week with a 48.22 point (-0.4%)
loss which was just the fifth losing session in September. Traders bought the dips throughout the week as the DJIA saw triple
digit intra-day swings on both Tuesday and Thursday. Despite several disappointing economic reports, traders kept a bullish
outlook throughout the week. For the period, the Dow lost 30 points (-0.3%) to close at 10829, snapping its four week win
This is indeed either a
breather or the knocking of the markets on a glass ceiling otherwise known as a sideways pattern. You know my concerns. While
September was as pleasurable as August was painful, there are still some major tests of technical resistance ahead before
we can feel comfortable with the idea of an uptrend.
As always, we must look to economic fundamentals to handicap the markets next technical moves. This last week
we had a minor drop in the ISM manufacturing index and the leveling off of the ECR I Weekly Leading Index. Meanwhile, consumer
sentiment offered a similarly uncertain picture. Based on what we continue to see from the economic data, this is a "watch
and wait" period in which short-term traders can try to take advantage of the upward trend an buy-and-hold investors
should remain mostly in cash on the sidelines.
With that out of the way, let’s talk about some longer-term business. In the last newsletter, I trumpeted some
of my recent calls in the biotech space – PBTH, CHTP, and SVNT were all double- or triple-digit winners. I also trumpeted
two of my short calls on Palm and RIMM and a long on Apple at $250 – likewise huge double-digit winners.
Just to make sure that I don't get too full of myself,
several readers absolutely hammered me for my short call on gold in mid July and my call to short the long bond in mid April.
I think it is worth talking about each of these trades because discussing the gold trade will help remind readers about the
importance of managing your trades and taking profits while discussing the bond trade will both underscore the need to cut
losses early and to understand from a macro point of view what drives bond prices and yields.
Let's start with my “short the gold market” trade.
On July 15 when I made the call, the exchange traded fund GLL which shorts the gold market as an unleveraged ETF, was
priced at $39.78. By July 29, it hit a high of $42.73 – a nice little gain.
At this point, a seasoned trader would've put up stop loss at at least the initial buying price,
and such a stop loss would have been triggered as early as August 6 – no harm, no foul. My
point is simply that any stock that you buy whether because of your own research or by reviewing the research of others requires
careful money management and risk assessment. If you don't know how to use stop losses and trailing stops and set your stop
losses near key levels of support, then you really have no business engaging in short-term trading at all.
So my advice if you are losing money on trades that first went up but then
went back down is to do some more research on trading techniques. In this regard, I can say without too
much self-promotion that my book When the Market Moves, Will You Be Ready? Is a pretty good manual on how to trade and manage
both your risk and cash..
turn to my “short the long bond” trade – arguably my biggest loser in the last several years.
My instrument of choice is an ETF called TBT. Let's break this one down.I first flagged this one around April Fools' Day when the price was just around $50. Unfortunately I wasn't
joking about buying this dog because as of now it's down to almost $30. Of course, anybody who rode this from $50 down to
$30 really needs to go back to Trade School. The most you should ever lose on a trade is 10%, In fact,
if you manage your money well, you can still make a lot of money even if six out of every 10 stocks you pick are losers.
My logic for shorting the long bond in April was simply
this: the economy looked like it was recovering, federal budget deficits were spiraling out of control, and these two factors
should have pushed the long bond yield up and prices down. What I didn't bargain for was the financial crisis in Europe that
made the dollar a safe haven for global investors – and when I say the dollar, what I mean is that these investors bought
a ton of US government bonds after exchanging euros for dollars. This had the effect of both driving the dollar up and bond
This is hardly the end of the
story, however. The TBT trade has continued to grow worse as the economy has softened and Federal Reserve Chairman Ben Bernanke
has pledged to engage in so-called quantitative easing to further stimulate the economy.
Quantitative easing is a way for the Federal Reserve to manipulate long
bond yields by purchasing US government bonds which are being issued to finance the US government budget deficit. The net
result of quantitative easing is to provide long bond holders with a hedge against the risk of falling bond prices. In this
way, the Bernanke policy of quantitative easing represents a “Bernanke Put” by providing bondholders with put
protection on bond prices just as from the late 90s to the early 2000, Fed chairman Alan Greenspan used a policy of easy money
to provide stock market investors with put protection of falling stock prices.
While I know this is going to sound like the stupidity of the 1990s tech bubble, I will now say
with no tongue in my cheek that if you liked TBT at $50, you will love it at $30. Yep, I haven't given up on this trade--
although I feel a little bit like the guy in the movie Tin Cup who kept trying to hit the ball over the water.
My reasoning is that at some point bond prices are
going to have to plummet and yields are going to have to skyrocket as an era of cheap money, huge deficits (and a possible
rising Chinese yuan) put a bloody end to the bond market bubble and the Bernanke Bond Put.
So I have begun to rebuild a small position in TBT and I continue to add
a little bit to it every time it drops another point. Call me crazy, but I have no doubt that this trade will eventually pay
off big. It's simply a matter of time, and the difference between doubling down on an exchange traded fund like TBT and an
actual stock of a company that is performing as badly as TBT is this: the company likely sucks and that is what explains its
poor stock performance. In contrast, with TBT, it's only as good or bad as it's macro environment –there are no dumb
managers or bad products or anything else to worry about. Because I just don't think interest rates will stay at record lows
forever, I going to keep a hand in the TBT game just like I kept trying prematurely to short housing stocks during the housing
bubble and kept getting burned – and then one day I didn't.
So that's my TBT story and I'm sticking to it. I'm bleeding a little bit with it, but my biotechs and other
trade have more than offset any small losses in TBT. Eventually I think TBT will be a good trade. At any rate, a position
in TBT helps keep me in tune with the economy as I have plenty of skin in the game to pay attention.
As a final note, there are often typos in this newsletter
and the culprit has to do with the fact that much of it is dictated using Dragon Naturally Speaking. The accuracy rate is
quite high, but some silly things do slip through. So if you see something that doesn't look quite right, trust the syntax
and make your own internal correction.
Sunday, September 26, 2010
Newsletter Week Ending October 1, 2010
12:20 pm edt
The upward trend in the US stock
market can't be denied – yet I continue to have my doubts and continue to be concerned about another sideways market
trap. To understand my concerns, please do the following.
Go to Yahoo Finance and pull up the one-year chart for SPY, the
exchange traded fund the Standard & Poor's 500 index. You can see in this chart that the stock market is exactly at the
spot it was back on January 20, 2010. You can also see that after the market surged off its lows in February of 2010 and peaked
in April, it traded in a clear sideways pattern. Now, again we find ourselves at the upper end of the range; and it is useful
to ask the question: What will propel this market forward?
The answer must of course lay in improving economic fundamentals.
So let's do a quick overview using my Always a Winner forecasting model.For starters, according to the Dismal Scientist website, the ECRI Weekly Leading Index "has been on a more positive trend recently,
though is not yet consistent with a stable recovery.” That's good, but still a question mark.
As another positive, the ISM
Manufacturing Index is still comfortably in the expansionary range at 56.3 – so our investment led recovery still has
some investment leadership. Consumer confidence rebounded in August – that's good news – but it is still at levels consistent with
slow growth. In a similar vein, retail sales have risen for a second consecutive month, albeit at a slow pace. Again some
good news tempered with reality.
The most startling bad news is the horror show that is new-home sales. After spiking in April
on the basis of what were then optimistic views of the economy coupled with government subsidies, home sales have fallen off
a cliff and now remain at a record low. In fact, this country is adding less than 300,000 new home units a year at the current
pace in a country of almost 300,000,000 people.
On top of this, existing home sales are at an 11 year low, with
only 4 million units being sold a year. Finally on the unemployment front, this country is generating fewer than 100,000 jobs per month,
which is far too low to materially reduce the rate of unemployment. So when we cycle back from this fundamental data to the technical indicators, you can see that
there is at least some case to be made for an upward stock market trend – if for no other reason than the risk of a
double dip recession seems to be receding and the US economy is plugging, if not chugging, along.
That said, in order to project
from this current short-term upward trend of the market a sustainable bullish move, one would have to heavily discount the
coming Obama hammer in 2011 in the form of higher taxes and a greater regulatory burden to be imposed on the private sector. Make no mistake about it, the "passive
aggressive" tax hikes the Obama administration will impose are significant – passive because Obama is going to
allow the Bush tax cuts to expire, aggressive because ObamaCare and other Obama programs are going to significantly raise
So we return to the eternal question posed by this newsletter: What are traders and investors supposed
At this point, short-term traders may well be able to take advantage of a continued uptrend; but if it turns out
to be a sideways market trap as I fear, only tight stop losses and sound money management principles will save you from the
kind of mini-gutting that many traders suffered in the month of August – again refer back to the chart of SPY and you
will see exactly what I mean.
As for long-term buy-and-hold investors, if you have been simply putting your money on a set of speculations
on secular trends that I presented in my video series for the Street.com, you'd be sitting pretty right now. Those speculations,
which I have done in conjunction with analysts Greg Autry and Jaysen Harris, included:
· Shorting Palm at $12 – it went as low as three dollars
· Shorting RIMM at $70 – he went as low was $47
long Apple – our call was at $250 and it is now at $292
In addition, I have for a long time recommended keeping at least
20% of one's portfolio and small-cap biotech stocks. Many of the biotech stocks – but not all – in my portfolio
are based on the analysis of a former student of mine and contributor to my website – Andrew Vaino of Roth capital.
Three of the best calls on this biotech front that have appeared in this newsletter include:
Prolor at 40 cents -- it went as high as seven dollars
Savient Pharmaceuticals – two weeks ago, I said on CNBC when it was
at $14 that if it got FDA approval, it would go above 20 and it has.
· Chelsea Therapeutics – I first mentioned this stock in the newsletter when it was about three
dollars. On CNBC 10 days ago, I said it could double if the FDA approved its drug and projected such approval the stock is
gotten as high as seven dollars.
The only bad news I can report right now about my small cap biotech speculations is that, with
the exception of SNT which has an important conference coming up, there are no short-term catalysts on the horizon likely
to move any of the ones I'm currently holding – so they are true buy-and-holds. Here's what's in my portfolio currently:
CHTP (I sold half of my position on the FDA news and I'm letting the other half ride for a bit); DEPO,DUSA,LPTN,MDVN,MITI,NRGX,SNT,SNTA.
I have also
begun building a small position in a company called Stellar, which is a pink sheet penny stock which has an interesting story
which I will share with you a future newsletter. (Anybody who has any information on this company, please share with me).
I will also be sharing more with you about SNT in the coming weeks as I continue to find this company frustratingly interesting.
As a final
note, there are often typos in this newsletter and the culprit has to do with the fact that much of it is dictated using Dragon
Naturally Speaking. The accuracy rate is quite high, but some silly things do slip through. So if you see something that doesn't
look quite right, trust the syntax and make your own internal correction.
Sunday, September 19, 2010
Weekly Newsletter -- The Gold-Plated Economy
1:01 pm edt
The stock market continues to show technical
improvement – even as the economy continues to exhibit fundamental deterioration. On the technical front, Market Edge
has its Strength Indices showing improvement while its Momentum Index remains very strong. At the same time, 81 of the 91
Industry Groups followed by Market Edge are rated either strong or improving. This all adds up to a stock market that continues
to inch up on weak volume.
Because the economic fundamentals do not yet support this early cyclical uptrend, I continue to think
it may simply be a sideways market trap. Two things that caught my eye last week included an unexpected drop in Consumer Sentiment
and a fallback to zero for the core inflation rate is measured by the CPI. Both are recessionary signals. On the other hand,
the ECRI weekly leading index has stabilized and resumed a modest upward trend, which is bullish news.
Of course, the big macro
puzzle right now is why gold is hitting an all-time high even as deflation continues to loom is a real possibility. My favorite
explanation, which I have offered to you before, is that because of the large budget deficits both Europe and the United States
are running, gold as slowly and quietly becoming the de facto reserve currency of the world.
On other macro notes,
we had yet another round of sparring over Chinese currency manipulation, this last week on Capitol Hill. Treasury Sec. Timothy
Geithner continues to maintain the untenable position the Chinese currency is grossly undervalued but that China is not a
currency manipulator. The only thing clear about the situation is that China continues to benefit from its undervalued currency
and its economy booms while America goes bust.
The other big news that has important implications for the American economy
on the currency question revolves around the manipulation of the Japanese yen by China through its large bond purchases in
Japan. These purchases are now forcing Japan to once again intervene in its currency market to weaken the yen – and
thereby gain back some advantage against countries like America in China.
Given the economic uncertainty, I continue to
hold significant fraction of my portfolio in cash while focusing on small-cap biotech stocks for returns based on science
rather than the economic cycle. Over the next week or so, one of those stocks – Chelsea Therapeutics – will have
its day of reckoning with the FDA regarding the viability of its hypertension drug Droxidopa. As I discussed on CNBC, Roth
Capital’s Andrew Vaino is handicapping the odds of success at about 75%. Stay tuned.
On CNBC, also said it was time to take your profits
in Savient Pharmaceuticals as, after its FDA victory, it has now risen to fair value – and will only rise further if
there is a bidding war over the company. While this is a possibility, it may be better to deploy capital elsewhere.
On the other
biotech fronts, LPTN saw a slight uptick in volume and price for a stock that is incredibly thinly traded. Translation: risk
is extremely high but there appears to be some movement on no news. When I see such movement, it often means that something's
going on within the company that may soon come to light. Stay tuned.
Last take: Be on the lookout this week for my latest
video for the Street.com where I will rate Nokia short or long.
(My small cap biotech portfolio -- CHTP,
Question for my readers: If any of you have any information about a penny stock called Savi Media (SVMI)
please send me an e-mail. The company makes a valve which claims to provide significant fuel efficiency and environmental
benefits. If true, this two cents stock should shoot to the Moon. However, that clearly has not been the case. Anybody
who can solve this SAVI mystery for me – is a fly-by-night pump and dump company or a misunderstood genius? –
I’d love to get your thoughts.
Sunday, September 12, 2010
11:21 am edt
Seeds of Destruction hit the Top 100 on Amazon last week in the business and economics category. If you want to listen to the Introduction to the book, you can download the audio file from the
top of this page.
have I seen this pattern before. IBD confirms a new uptrend. Market Edge shows a broad
technical improvement to the market. Talking heads say get in while the getting is good – and don’t
worry about the weak volume. Shall I be seduced?
I don’t think so. All
I need to do to be convinced that this is another harlot is to look at the one-year chart of SPY. For starters,
you can see a clear range bound market since May.
You can also see that prior to this range-bound
pattern, SPY peaked at a little over 120 for the year in April and right now it’s just below the short term high of
112 that it reached in the Summer run-up from July 2.
It was that Summer run-up that was the last Temptress that sucked
in a lot of retail investors and then slammed them with a sharp 10% decline. Trust me, only the Big Money
Computer Traders are making out like bandits in this kind of sideways environment.
So in order to tempt me, SPY has to blow past
120 with above average volume and broad sector support. In order to do that, the economy is going to have to show a lot more
strength. Until then, cash is king.
Here are my two main exceptions:
#1: Apple remains a solid secular long –
see my video for TheStreet.com that has Apple at $350 within a year or so.
#2: My small cap biotech portfolio --
CHTP, CLDA,DEPO, DUSA,LPTN,NRGX,SNTA,SNT,SVNT
Saturday, September 4, 2010
8:34 pm edt
Here I am, back from a three-week
hiatus. You may recall from my last newsletter prior to that hiatus I urged all my long term investors to stay in cash while
possibly allocating some portion of their portfolio to biotechs.
So far, this seems to have
been pretty good advice. The stock market had one of its worst months of August ever. Of course, over the past week or so,
the market has been rallying so many of the talking heads are all a twitter about the arrival of a new bull market.
This continues to seem pretty much like a sucker's game to me. To understand why, try this little
exercise. Go to Yahoo finance and pull up the three-month chart for SPY -- the exchange traded fund the Standard & Poor's
500 index. If you got suckered into buying the bottom hit on June 6, you would've had a very healthy gain by June 17. However,
by July 6, you would've been deep in the red.
By the same token, if you bought
the bottom on July 2, you would have been in great shape right up till August 9 – and then been gutted like a pig.
Okay, so let's say you were smart enough to buy the dip on September 3 at $105 a share. Now you're
up already five bucks and you think you're a genius. But what makes you think that after another run-up, the market is just
going to run right back down?
Please keep in mind, I'm usually not this cynical about the
market trend. Usually, it's pretty damn clear whether the economy is, as Bob Dylan might say, "busy being born"
or "busy dying." But there is so much uncertainty right now in the economy, that the only really sensible thing
for the market to do is to trade in the sideways pattern until things resolve themselves.
myself am not particularly in the double dip recession camp. When I see is what we've had over much of the last decade –
slow GDP growth well below our potential output. That will in turn mean persistent high employment and stagnant wage growth.
How you get a bull market out of that – and the Dow at 20,000 – I really don't know.
wish I had better news, but we have to trade or invest the hand that we are dealt – or sit patiently on the sidelines
For traders, I myself am growing increasingly disenchanted with a long short strategy
unless you have great skills at risk management and rapid trading.
What happens in a sideways
market with a hedge portfolio is that your shorts get stopped out when the market runs up, and your longs get stopped out
when the market runs down. All you wind up with is modest losses over a lot of stocks that add up to a big loss – plus
a lot of transactions costs.
So if you didn't make any money over the last couple months
in your short-term trading strategy, I'd strongly advise you to hang your cleats and mouse up for a while until this market
is easier to make money on.
As for the long-term investor, I continue to recommend cash for
now. I also continue to hold about 20 to 25% my own portfolio and small-cap biotechs. And by the way, I will send you a Special
Report on my biotech picks this coming Wednesday based on a conversation I had one of the top biotech analyst in the world
– Andrew Vaino of Roth capital. (I did a segment last Friday on CNBC that talked about a few of the stocks Andrew is
following, but a lot of the best stocks I could really talk about on TV because their small caps.)
take: my new book Seeds of Destruction with former Bush White House chief economic advisor Glenn Hubbard is now available on Amazon and at Barnes & Noble and,
as they say, other fine bookstores everywhere. Please buy this book right away, not because I need your royalty money, but because unless the boneheads in Washington change their policy tunes
pretty damn quick, we are going to keep heading right down the tubes.