Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week:  Hedge Me This Batman

Note: In celebration of my latest book coming this August, I have re-christened this newsletter "Always a Winner Strategies." The book is the culmination of almost a decade of research examining how the business cycle strongly affects both the bottom line of companies in the performance of portfolios.

Market Pulse

I have now gone into a full defensive hedging posture in my portfolio based on the weakening fundamental and technical conditions of this market. In particular, I have hedged each of my 2011 Call Leaps in stocks such as General Electric and Intel. My only "long only" stocks are a few biotechs that are long-term buy and hold plays largely outside the business cycle.

In the area of fundamentals, "green shoots" have now gone the way of all flesh. What we have now is a largely mixed bag of data out of which it's difficult to forecast a strong economic recovery until at least 2011. The stock market's recent bearish reversal in mid-June reflects the new reality of, at best a weak recovery in 2010, and at worst, stagnation or a double dip.

A little bit of recent history here is worth remembering. In March of 2009, the S&P 500 index reached a bottom and then reeled off a more than 30% gain by the end of May.  However, during the week of June 15^th, the S&P dropped about 3%.  Then, on Monday, June 22^nd, the S&P gave up another 3% -- suggesting a bearish reversal.

In fact, I'm a bit annoyed at myself for not seeing that reversal coming. Ordinarily, I pay fairly close attention to some international exchange traded funds that serve as an early warning sign for determining the US market trend. Based on a technical analysis, these exchange traded funds were screaming reversal but, being the summertime, and being a bit lulled to sleep by the full market run-up, I got lazy and gave back some of my hard-won gains. That said, you can see the value of using these exchange traded funds in a short video I did for theStreet.com. Click here to watch that video.

 

As for my hedging strategy, there are couple of things that can happen here. If I am wrong, and we see a resumption of the bullish uptrend, the worst that can happen is that I have preserved the gains I made during the March to May run-up minus the bite that was taken out by the June pullback. However, if I am right, and the market goes down, I can make some money on my puts and cash them out. Then, I still may have the opportunity to profit from my 2011 leaps if the economy does indeed strongly recover by then.

I prefer these possibilities to remaining long in this market and letting all my winners become losers. I also prefer to this hedging strategy to simply cashing out my 2011 Calls because the spreads are such in options that you really take a bath if you cash out in the downtrend. So stay tuned. Let's see how this one pans out.

Short Takes

1. Last week's attempt to deify Fed chairman Ben Bernanke turn my stomach. From the pundits and politicians to sages like Warren Buffett, what all of these Bernanke apologists forget is that whatever steps Bernanke might've taken to "get us out of the mess," Bernanke had a huge role to play in getting us into the mess to begin with. His easy money policies helped fuel a housing bubble at the same time that these policies debased the dollar and killed the European economy and ultimately harmed our export growth. At a critical time, Bernanke ironically was also slow to cut interest rates as the 2007 recession neared.

2. While Bernanke should be fired, there's no way in hell Larry Summers should be his replacement. Any damn fool or defrocked Harvard president can spend his way out of an economic crisis but it takes a calm clear head to resist that siren song and Summers is incapable of that. That's why my vote would go to Martin Feldstein -- Summers' onetime mentor and one of the few people who might be able to lead us back to the promised land of prosperity.

3. To my good friends in pundit land, when you're talking about how the American savings rate is rapidly rising, please remember that the savings rate is a bogus statistic. It only includes wage income. When savings rates were "low" during both the housing and tech bubbles, people were making capital gains hand over fist so that their effective savings rate was actually probably higher.

4. "Cap and Trade" is flat out stupid. If you legitimately want to address the carbon issue, the best way to do it is with a carbon tax that also includes a carbon tax on any goods imported into the United States. By taxing imports into the US, you solve the problem of China and India not wanting to play the global warming solution game.

And yes, any solution to the global warming problem will raise the price of fuel and electricity in every kind of energy we use. If global warming is real, the cost of solving that problem will be a reduction in the income levels and lifestyles of everybody that lives on the planet. Ergo, we have a big decision to make.

Using current economic conditions as an excuse not to make that decision is almost as bad as implementing a "cap and trade policy" that won't reduce emissions and will simply line the pockets of whoever is smart enough to game the system. This is just one more chapter in the "Obama promised us smarter government that seems to be incapable of delivering it" book.

 Navarro on TheStreet.com

Click here to review my videos on TheStreet.com.  

 Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week:  Bull Market IOUs

Note: In celebration of my latest book coming this August, I have re-christened this newsletter "Always a Winner Strategies." The book is the culmination of almost a decade of research examining how the business cycle strongly affects both the bottom line of companies in the performance of portfolios.

Market Pulse

Financial markets around the globe continue in a bullish uptrend. The important paradox to note in this cyclical bull market is the continued weakness in the private sector elements of the GDP equation -- consumption, investment, and exports. Truly, it is primarily the fourth component of the GDP equation -- government spending -- that is propelling world markets.

My ongoing concern, which is writ large in the cover story in the Economist this week, is the huge build up in debt in the world's major economies. From the United States to China, governments around the world are using traditional Keynesian fiscal stimulus and historically large budget deficits to dig their economies out of the credit crisis depths of despair. On top of the burgeoning debt, countries and continents ranging from the United States and China to Japan and much of Europe face a graying population that will impose a significant fiscal burden on the younger generations. There will be those young people who will be tasked with the job of supporting a whole new cadre of Gray Panthers -- and the politics won't be pretty.

The macro trends point clearly to a continuation of the cyclical bull -- albeit with a likely secular decline following at some point on the horizon. The question this column will be focused on over the coming months is simply how long the current bull lasts. Already, the seeds of its own destruction may be seen in a rapidly steepening yield curve and rapidly rising energy prices.

Of course, I don't really mean to bum you out here. After all, it's been a lot of fun the last few months, and it is really easy getting used to racking up double-digit gains on the portfolio on a monthly basis. That, like the current fiscal stimulus bubble, is simply unsustainable -- unless of course you always stay ahead of the macro trends. So continue to make your money on the long side for a while. Just be ready for the other shoe to drop.

The Coming China Wars

You may find my latest article, written with Greg Autry, to be quite interesting. It appeared last Thursday in the San Francisco Chronicle; and it analyzed the various implications of the latest edict from Beijing regarding Internet censorship. Click here to go directly to the article. It is truly hair-raising.

———-
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.

 Always a Winner Strategies

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week:  Full Bull Ahead

Note: In celebration of my latest book coming this August, I have re-christened this newsletter "Always a Winner Strategies." The book is the culmination of almost a decade of research examining how the business cycle strongly affects both the bottom line of companies in the performance of portfolios. As would this newsletter, "read it and reap."

Market Pulse

The macroeconomic environment remains favorable, and therefore, the stock market, both here in the US, and in both Europe and Asia, remains in a bullish mood. Until further notice, the trend is up.

The latest concern voiced by the Bears, adds reflected in last week's upward surge in long-term interest rates and a steepening yield curve, is the possibility of inflationary pressures building. This concern is being reflected in the Fed Fund Futures market, which has begun to price in the possibility of a Fed rate hike as early as the Fall.

The big question underlying this concern about inflation is whether the steepening yield curve reflects the newly expanding economy and is simply a bullish signal or, alternatively, whether that's steeping curve simply reflects fears over inflation driven by the unprecedented increase in the money supply by the Federal Reserve in league with the U.S. Treasury Department, the White House, and Congress.

I will have more to say about the issue of the steepening yield curve very shortly. In the meantime, my only other suggestion for the week is to take a look at my latest video on at TheStreet.com.  This video explains why the dollar is in a long-term secular decline even as it experiences bullish uptrends like we saw last week in like we saw during the summer of 2008. The video also offers a number of useful ways to hedge the falling dollar risk for your portfolio. And by the way, on this note, the dollar rallied last week precisely because the market is worried about Fed rate hikes. When the Fed hikes interest rates, this attracts relatively more foreign investment and thereby draws the dollar up. Given the massive budget deficits, trade deficits, and increases in the money supply that we are experiencing, however, any such cyclical move up can only be short-lived.

———-
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.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week: Living in a World of “Rational Expectations”

Market Pulse

The theory of “rational expectations” was developed by conservative, neoclassical economists (primarily the “Chicago School”) to explain why it is fruitless to engage in any kind of Keynesian fiscal or monetary policy to artificially stimulate an economy.   The best way to explain this theory -- which is HUGELY relevant for today’s financial markets -- is with an example.

Suppose, then, that the US government engages in a massive fiscal stimulus to jumpstart an economy in recession.  But also suppose that this massive stimulus will require equally huge budget deficit financing that over time will surely increase both interest rates and inflation.  Since people are rational, they will therefore “expect” the advent of higher interest rates and inflation and behave in ways that will defeat the intent of the stimulus.

In particular, consumers will save more because they know the stimulus will only eventually provoke an even deeper recession.  This behavior will suppress consumption spending, thwarting recovery.  Businesses will also try to raise prices in anticipation of inflation while workers will demand higher wages -- thereby causing an inflationary shock earlier rather than later.  Bond market investors will refuse to buy the bonds needed to finance the deficits because they know as interest rates rise, bond prices will fall.  Stock market investors won’t buy stocks because they know another bear market is coming.  And foreigners won’t help the US government finance its deficits because they know the dollar will become worthless -- along with their US bond holdings.

The liberal critique of rational expectations theory -- think Krugman or Reich -- is that people aren’t really that smart about macroeconomics or that rational to fully anticipate all of the effects so there is a period of time during which a fiscal stimulus can actually work its magic.

So who’s right?

Well, right now, the financial markets are a living, breathing experiment to prove -- or disprove -- the rational expectations argument.  When BOTH the stock and bond markets turned bearish last week, that seemed to be a signal that the rational expectations argument may hold sway.

Of course, readers of this column will know that I’ve been speculating on at least a brief bullish cycle of a few months or even a year or more.  However, readers should also know that I am a secular bear precisely because the Obama-Bernanke-Geithner-Summers Program contains the seeds of its own destruction -- see paragraphs above.

So, with last week’s action, we are back in dangerous waters again ever so quickly.  I’m holding my GE 2011 leaps and 2011 leaps for Dupont because I think that company manages the business cycle well.  However, I bailed on my Delta leaps with a small profit -- I see oil and jet fuel prices on the rise again as the dollar falls.

I may also cash out my Intel and B of A leaps with small losses -- depending on what unfolds over the next week or so.  So stay tuned….

International Notes:

This article of mine appeared on October 12, 2006 in the Chicago Tribune.  It is as relevant today as it was then.

Only China, not U.S., can rein in N. Korea

North Korea is a significant threat to global economic and political security–even without nuclear weapons. Neither the U.S. nor UN sanctions can bring North Korea to heel–only China can.

The North Korean economy, and therefore its political system, is immune to UN sanctions because its primary economic activity is to traffic in illegal arms, drugs, and counterfeit and smuggled goods. It sells weapons to rogue nations and terrorist organizations. North Korea is the primary supplier of methamphetamines to Japan and much of Asia and a significant link in the world heroin chain. Fresh, crisp and decidedly counterfeit U.S. dollars are printed in North Korean government mints and distributed around the world, and North Korea is a major conduit for Chinese counterfeit goods and a leading supplier of smuggled cigarettes.

In this illegal trade, North Korea plays the “wholesaler” to crime” retailers” that include the Russian mafia, the Japanese yakuza, the China-Hong Kong triads and a thriving Thai underworld. This economic activity takes place far below the reaches of any UN sanctions; and each of these activities contributes in its own unique way to global economic, political or social instability.

Add to this volatile black market mix a nuclear weapons capability and it is easy to understand why world leaders are so uneasy. But who might these North Korean nuclear weapons be aimed at?

The answer certainly isn’t South Korea. Even a madman like North Korea’s dictator Kim Jong Il is rational enough to realize that to drop a bomb on Seoul would be merely to invite nuclear fallout back on himself. That leaves other targets like Beijing, Tokyo or Anchorage. It also leaves the worst nightmare of the U.S.: the sale of a North Korean suitcase nuke to a terrorist organization that eventually winds up obliterating New York or Los Angeles or Chicago.

Clearly, this nuclear rat that is now roaring must be dealt with, but the U.S. is totally unequipped to do so. U.S. military capabilities are stretched to the breaking point in the Middle East, and U.S. troops would likely be no match for North Korea’s 1 million-plus army in a conventional land war. A naval blockade is nonsensical, particularly since it would likely trigger a North Korean move to overrun Seoul. That leaves only some type of surgical missile strike aimed at destroying North Korea’s nuclear capabilities, but that would probably provoke either the same type of North Korean attack on South Korea or a sharp confrontation with the Chinese.

Given these grim realities, what’s a world to do? In truth, the only solution is a Chinese one. Just as the Soviet Union once propped up Fidel Castro’s Cuba economically, so now does the Chinese government prop up North Korea. China now provides North Korea on a heavily subsidized basis with much of the food and energy it needs. To withdraw this aid would be to both starve and freeze a wide swath of the North Korean population and trigger a political implosion.

 

Perhaps even more important, China continues to provide North Korea with the same kind of military backup and shield that it once did with such effectiveness during the Korean War of the 1950s. Behind this Chinese shield, North Korea is free to tweak the noses of everyone from the U.S. president to the UN secretary general. Without this shield, it would be truly isolated and at least much easier prey for a joint U.S.-South Korean strike.

China now has a very important choice to make. On the one hand, North Korea provides an important strategic buffer from a U.S.-aligned South Korea and a useful economic conduit for China’s counterfeit activities, which contribute a significant share to China’s booming gross domestic product. On the other hand, China must now face a madman with an arsenal of nuclear weapons that could just as easily be aimed at China as the U.S.–or bring down the world economy with a terrorist nuclear strike. With North Korea’s recent nuclear testing, this hardly seems like a difficult choice.

This Week: Profit-taking Pause or Bearish Reversal

Click here for latest Navarro segment on CNBC -- GM exports Chinese cars to U.S!

Market Pulse

Last week’s market decline must raise the question: Was that simply a healthy pullback on some profit-taking in an otherwise newly established bull market OR a nasty harbinger of bearish things to come?

The analytical driver of this column is that the stock market is a leading indicator of the business cycle.  Under that assumption, the decline looks more like a healthy temporary pullback.  Despite some bad news on retail sales last week, there remains mounting evidence that economic recovery is proceeding apace around the globe and that the “green shoots” will grow sufficiently as to end the recession by the end of the year.

That said, this column also sees the current bullish uptrend as a cyclical bull romping naively in a secular bear market.  It is just a matter of time before the U.S. economy is crushed beneath the weight of its own budget and trade deficits.

The fact remains that the Obama-Bernanke-Geithner-Summers continues to lead us down a path that is as political expedient as it is economically destructive (for you Lefties, be assured that Bush was as bad or worse).  So the only question is when will the secular bear snuff out this latest cyclical bull -- sooner or later?  It is because of this question that bad weeks like last week make investors so rightfully nervous.

Given this perspective, it is critical to keep one eye on the market technicals and the other on the economic fundamentals.  I’m still cautiously long GE, Dupont, B of A, and Delta while my long on Intel is testing my patience.  (I also am holding my usual gaggle of high risk biotechs.)  But I’m ready to fold’em if we break below 8,000 on the Dow.

Below, you will find two bonus items in the newsletter this week in the form of opeds on completely unrelated subjects.  The first is GM’s wacky (or Machiavellian) proposal to build cars in China and export them to the U.S. using some of the taxpayer’s bailout money.  The second oped argues that California poses a very serious threat to the national economic recovery -- watch the results of this week’s California ballot measure carefully!

Selling Coal to Newcastle and GM Cars to Detroit (Click here for CNBC segment2 on this)

General Motor’s announcement that it plans to manufacture cars in China for export to the U.S. as part of its recovery plan must rank as one of the most provocative and absurd corporate decisions in this oppressive season of massive corporate bailouts.

Indeed, it is the high of absurdity for U.S. taxpayers to shell out $16 billion in bailout money (and counting) to GM so the company can outsource jobs to China rather than employ Americans in Detroit.  The only rational explanation for such an “in your face” proposal is that we are being “Fritzed.”

In particular, this cars from China proposal may merely be a cynical bargaining ploy by GM CEO Fritz Henderson to wring more concessions out of the UAW.   If this is so, Fritz ought to be run out on a jackass from Detroit -- he doesn’t even warrant a car ride -- and inducted right into the international CEO Hall of Shame.

If, however, Fritz and GM are serious, this proposal is just plain stupid from a U.S. policy point of view.  Under current anything but free trade rules with China, GM could export its Chinese-made cars to the U.S.   However, any cars that GM made in the U.S. would be very difficult to export to the Chinese market.

It’s not just that China slaps a heavy 25% tariff on American cars imported into China.  As part of its Great Wall of Protectionism, China also imposes stiff domestic content rules so that at least some of the U.S. “imports” into China must contain Chinese auto parts.

On top of these protectionist barriers, China won’t even let a foreign carmaker like GM sell into its market unless it first sets up a local partnership and “voluntarily” turns over some of its technology.  However, such implicit forced technology transfer not only grossly violates free trade rules established by the World Trade Organization.  The transfer of such technology effectively dooms foreign automakers like GM to playing subservient role to China over the longer term as China combines U.S. technology with its vaunted cheap labor force..

Beyond these questions of taxpayer subsidies for outsourcing and Chinese protectionism, there are several broader issues.  One such issue is the safety of Chinese-made vehicles -- or lack thereof.

To date, China’s track record on safety is an abysmal one.  Thus far, American consumers have been subjected to lead-filled toys, pet food laced with melamine, toothpaste laced with antifreeze, Viagra dosed with strychnine, dry wall emitting gases more dangerous than coal dust, and a whole cornucopia of rancid food.

In addition, Chinese cars have routinely failed crash tests.  On top of this, Chinese cars are prone to be riddled with counterfeit parts ranging from brake pads and suspensions to windshields and spark plugs.  If these counterfeit parts don’t kill you by causing a crash, they can violate your warranty.

Finally, there arises the issue as to why car manufacturing is gravitating to China.  The conventional wisdom is that its cheap labor that gives China its edge.

In truth, much of China’s competitive edge comes from anti-competitive practices ranging from currency manipulation and massive export subsidies to the aforementioned protectionist barriers.  In addition, Chinese counterfeiting and forced technology transfer together save Chinese companies tens of millions of dollars in research and development expenditures and thereby convey an additional advantage.  If Chinese companies didn’t enjoy these unfair advantages -- all of which are gross violations of free trade -- Detroit and the American Midwest would be far more competitive and prosperous than it currently is.

Peter Navarro is a business professor at the University of California-Irvine, a CNBC contributor, and author of The Coming China Wars. ( www.peternavarro.com)

California’s Budgetary Car is About to Drive Off a Cliff

This time the wolf will really be here -- if California voters fail to approve all four measures on May 19’s special ballot.  The major problem now is that there are no really credible politicians or political organizations to deliver that critical message to a rightfully cynical and jaded public.  Hence, all of the measures are lagging badly in the polls.

To be clear, the wolf we should all fear is the transformation of California’s already severe recession into a bona fide depression.  Put simply, a failure to pass these ballot measures will result in widespread government layoffs and a dramatic cutback in government expenditures -- including deep cuts in education, police and fire protection, prisons, and other essential services. 

In the political gridlock and chaos that is likely to ensue, the combined effect will be a severe shock to an economy already reeling.  That the state already has one of the highest unemployment rates in the country should not be lost on any voter entering the polls next Tuesday.

Any such economic meltdown will likely not be confined to California’s borders.  With the California economy constituting close to 15% of the nation’s GDP, a strong contractionary shock within the Golden State would ripple first through the West and eventually across the nation.  With the current economy recovery hanging by a thread, California’s fall could, in turn, trigger the dreaded “double dip” recession nationally -- just when the country and its financial markets were beginning to breathe a collective sigh of bullish relief.

In fact, we’ve already seen how a faltering California economy can help take down the country.  The current national recession was largely triggered by a housing market collapse that had a major source of origination in California.

That this message is not credible to the general public may be laid directly on the doorsteps of politicians across the ideological spectrum.   At the top of this sad and sorry list is a governor who has become a caricature of his own persona.  While Schwarzenegger is still generally liked, he is increasingly simply not believed and all too easily mocked.

As for the California legislature, there is not a single individual in either chamber of government that has not been tainted by the collective failures of the institution.  To the general public, California’s senators and assembly members to a man and a woman represent a gaggle of squabbling and squawking Lilliputians more concerned with their own advancement up the political ladder than the welfare of the state. 

A similar lack of credibility exists among many of the organizations that voters used to trust.  At the top of this list are the now largely discredited police and fire unions.  After using their badges of honor for years to grub for hefty pay raises and fat pensions at the expense of other public employees and the goal of fiscal responsibility, few voters are now swayed by their endorsements.

The tragedy of all of this is that only the richest and most insulated few in this state will go unscathed if these ballot measures fail to pass.  School classrooms will be slammed shut.  Local governments will be stripped of funds.  Deep cuts in police protection will collide with rising crime in a deteriorating economy.  Fire fighting budgets will be slashed in a state that would keep Nero fiddling round the clock.  And taxes will eventually have to spike to pay for all the mayhem that likely will ensue.

That this profound message can be so lost on an electorate that has become so angry, numb, or skeptical suggests a much broader failure of our entire democratic system in the state. 

Peter Navarro is a professor at the Paul Merage School of Business, University of California-Irvine.  www.peternavarro.com

Selling Coal to Newcastle and GM Cars to Detroit (Click here for CNBC segment2 on this)

General Motor’s announcement that it plans to manufacture cars in China for export to the U.S. as part of its recovery plan must rank as one of the most provocative and absurd corporate decisions in this oppressive season of massive corporate bailouts.

Indeed, it is the high of absurdity for U.S. taxpayers to shell out $16 billion in bailout money (and counting) to GM so the company can outsource jobs to China rather than employ Americans in Detroit.  The only rational explanation for such an “in your face” proposal is that we are being “Fritzed.”

In particular, this cars from China proposal may merely be a cynical bargaining ploy by GM CEO Fritz Henderson to wring more concessions out of the UAW.   If this is so, Fritz ought to be run out on a jackass from Detroit -- he doesn’t even warrant a car ride -- and inducted right into the international CEO Hall of Shame.

If, however, Fritz and GM are serious, this proposal is just plain stupid from a U.S. policy point of view.  Under current anything but free trade rules with China, GM could export its Chinese-made cars to the U.S.   However, any cars that GM made in the U.S. would be very difficult to export to the Chinese market.

It’s not just that China slaps a heavy 25% tariff on American cars imported into China.  As part of its Great Wall of Protectionism, China also imposes stiff domestic content rules so that at least some of the U.S. “imports” into China must contain Chinese auto parts.

On top of these protectionist barriers, China won’t even let a foreign carmaker like GM sell into its market unless it first sets up a local partnership and “voluntarily” turns over some of its technology.  However, such implicit forced technology transfer not only grossly violates free trade rules established by the World Trade Organization.  The transfer of such technology effectively dooms foreign automakers like GM to playing subservient role to China over the longer term as China combines U.S. technology with its vaunted cheap labor force..

Beyond these questions of taxpayer subsidies for outsourcing and Chinese protectionism, there are several broader issues.  One such issue is the safety of Chinese-made vehicles -- or lack thereof.

To date, China’s track record on safety is an abysmal one.  Thus far, American consumers have been subjected to lead-filled toys, pet food laced with melamine, toothpaste laced with antifreeze, Viagra dosed with strychnine, dry wall emitting gases more dangerous than coal dust, and a whole cornucopia of rancid food.

In addition, Chinese cars have routinely failed crash tests.  On top of this, Chinese cars are prone to be riddled with counterfeit parts ranging from brake pads and suspensions to windshields and spark plugs.  If these counterfeit parts don’t kill you by causing a crash, they can violate your warranty.

Finally, there arises the issue as to why car manufacturing is gravitating to China.  The conventional wisdom is that its cheap labor that gives China its edge.

In truth, much of China’s competitive edge comes from anti-competitive practices ranging from currency manipulation and massive export subsidies to the aforementioned protectionist barriers.  In addition, Chinese counterfeiting and forced technology transfer together save Chinese companies tens of millions of dollars in research and development expenditures and thereby convey an additional advantage.  If Chinese companies didn’t enjoy these unfair advantages -- all of which are gross violations of free trade -- Detroit and the American Midwest would be far more competitive and prosperous than it currently is.

Peter Navarro is a business professor at the University of California-Irvine, a CNBC contributor, and author of The Coming China Wars. ( www.peternavarro.com)

California’s Budgetary Car is About to Drive Off a Cliff

This time the wolf will really be here -- if California voters fail to approve all four measures on May 19’s special ballot.  The major problem now is that there are no really credible politicians or political organizations to deliver that critical message to a rightfully cynical and jaded public.  Hence, all of the measures are lagging badly in the polls.

To be clear, the wolf we should all fear is the transformation of California’s already severe recession into a bona fide depression.  Put simply, a failure to pass these ballot measures will result in widespread government layoffs and a dramatic cutback in government expenditures -- including deep cuts in education, police and fire protection, prisons, and other essential services. 

In the political gridlock and chaos that is likely to ensue, the combined effect will be a severe shock to an economy already reeling.  That the state already has one of the highest unemployment rates in the country should not be lost on any voter entering the polls next Tuesday.

Any such economic meltdown will likely not be confined to California’s borders.  With the California economy constituting close to 15% of the nation’s GDP, a strong contractionary shock within the Golden State would ripple first through the West and eventually across the nation.  With the current economy recovery hanging by a thread, California’s fall could, in turn, trigger the dreaded “double dip” recession nationally -- just when the country and its financial markets were beginning to breathe a collective sigh of bullish relief.

In fact, we’ve already seen how a faltering California economy can help take down the country.  The current national recession was largely triggered by a housing market collapse that had a major source of origination in California.

That this message is not credible to the general public may be laid directly on the doorsteps of politicians across the ideological spectrum.   At the top of this sad and sorry list is a governor who has become a caricature of his own persona.  While Schwarzenegger is still generally liked, he is increasingly simply not believed and all too easily mocked.

As for the California legislature, there is not a single individual in either chamber of government that has not been tainted by the collective failures of the institution.  To the general public, California’s senators and assembly members to a man and a woman represent a gaggle of squabbling and squawking Lilliputians more concerned with their own advancement up the political ladder than the welfare of the state. 

A similar lack of credibility exists among many of the organizations that voters used to trust.  At the top of this list are the now largely discredited police and fire unions.  After using their badges of honor for years to grub for hefty pay raises and fat pensions at the expense of other public employees and the goal of fiscal responsibility, few voters are now swayed by their endorsements.

The tragedy of all of this is that only the richest and most insulated few in this state will go unscathed if these ballot measures fail to pass.  School classrooms will be slammed shut.  Local governments will be stripped of funds.  Deep cuts in police protection will collide with rising crime in a deteriorating economy.  Fire fighting budgets will be slashed in a state that would keep Nero fiddling round the clock.  And taxes will eventually have to spike to pay for all the mayhem that likely will ensue.

That this profound message can be so lost on an electorate that has become so angry, numb, or skeptical suggests a much broader failure of our entire democratic system in the state. 

Peter Navarro is a professor at the Paul Merage School of Business, University of California-Irvine.  www.peternavarro.com

Market Pulse 

The U.S. stock market is now in a clear upward bullish trend.  The fundamentals of “green shoots” coupled with some bullish technicals (moving averages, accumulation/distribution, etc.) all point to a rally for now. 

On the fundamentals, both the ISM Manufacturing Index and Consumer Confidence are off their bottoms.  In addition, the ECRI Weekly Leading Index is trending up and pointing to a recession “moderating or ending later in the year.” 

Now is the time to make some money on the long side.  If you did your research while you were sitting in cash as I suggested, then you likely know where to deploy your funds.   

The role of this newsletter is, however, much like that of what William McChesney Martin once said the role of the Fed was, i.e., “to take the punch bowl away just when the party is getting good.” In that spirit, what we will be on the lookout for will be any signs that the recovery may falter. 

My two big concerns now, which I discussed on May 8, 2009, on CNBC, are Europe and the “seeds of the recovery’s own destruction” planted by the “cures” from the Obama Administration.  (CLICK HERE to view the CNBC clip.) 

There can be no global recovery without a strong Europe.  Europe has been severely weakened by the easy money policies of the Bernanke Fed which caused the euro to rise and European exports to fall.  Now, Europe is having a very hard time getting off the recessionary deck and is the “weak sister” in the global recovery. 

My second concern is the wave of inflation that inevitably must hit because of the huge Obama budget deficits from the fiscal stimulus and TARP coupled with the printing money machine Bernanke is operating at the Fed.  (For the record, Bernanke is the WORST chairman in Fed history and is almost singlehandedly destroying our currency.)

So let’s watch this carefully.  All the global stimuli have to give us all a good bullish rush.  The question will be for how long.  Just don’t get caught fully invested when things head south -- so watch this column weekly. 

Last take: My BoA buy looked dismal at its issuance, but it is roaring now.   See my analysis in the Street.com for a rationale as to why I think BOA, Wells Fargo, and JP Morgan all are good buys -- but bad for the mortgage market.     CLICK HERE to access article entitled “This Mortgage Market Mess Can Be Traded.” 

SOME NEWSLETTER TRACK RECORD HIGHLIGHTS: 

Nov 2007 -- Called for a move to cash.  Hit very close to top and maintained cash position for over a year as market fell by more than 40%.

Feb 12, 2009: With Dow just below 8000 (7,932), called for the Dow to head down to as low as 6000.  By March 9, it closed at a low of 6,443

March 10, 2009: When market hit 6,500ish, I Issued a buy for GE at 8 bucks and Dupont at $16.50.  GE is now near $14 and Dupont is at $28 for gains of 75% and 70%, respectively.

Other stocks or ETFs I indicated early April that might be good longs: Delta Airlines, Bank of America, Intel, and QQQQ. 

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: Gaga Over “Green Shoots”

Market Pulse

Last week’s Earth Day notwithstanding, “Green Shoots” is not some wheat grass concoction offered up at the health food bar.  Rather, it’s the term that seems to have spread like a virus across the financial press to describe some glimmer of hope on the horizon for the global economy.

Upticks in leading indicators like consumer confidence and the ISM index are offered in support of the green shoots hypothesis. The latest stock market rally likewise offers some support for the idea that the worst might be over.

The green shoots gaga notwithstanding, opinion remains split over whether the global economy has begun to improve or, alternatively, is simply seeing the pace of its deterioration slow dramatically. To sort that issue out, it's worth going around the globe and doing a quick check.

The consensus seems to be that China is exhibiting the most robust recovery. Much credit is being given to a massive fiscal stimulus package which was introduced months ago. (I wrote about this fiscal stimulus in a previous newsletter, and what was interesting at the time was how the Chinese were able to implement it even before the US had -- the theme being the "student learns from its master." So far so good, but the one caution on China is whether the government might be cooking the statistical books to hide a situation that may be worse than described in the press.

The consensus also seems to be that Europe is the sick man of the globe. Of the major economies, Great Britain is the most pathetic. What I find so funny about the whole situation, in a darkly comic way, is how a country which is home to both the Economist magazine and the Financial Times -- the two premier financial publications in the world -- can mismanage its economy so thoroughly. Its balance sheet is right out of a Stephen King novel.

As for the United States, the jury has to be still very much out. Yes, the fiscal stimulus is on its way. And yes, the housing market seems to be stabilizing. But one must continue to wonder how a country with double-digit unemployment which continues to worsen can possibly turn itself around in the near-term.

These uncertainties are reflected in the technical characteristics of the stock market. Readers of this newsletter were in on the ground floor of the latest rally, but I did warn last week that the market's inability to decisively zoom past 8000 on the Dow is a big cautionary flag.

My bottom line here is twofold: let's look for some more green shoots in terms of the data and let's see if the Dow can put a couple of solid up days on the board and leave the 8000 level of quasi-resistance behind.

Last take: Last weekend’s newsletter added Bank of America to my buy list. If anybody over the weekend thought it was a good idea to put in a "buy at the market open at the market price" order on B of A, they likely would be in the red right now.  (NEVER use buy at the open market orders - trader’s tip)

In fact, Bank of America had a horrible week last week. This week may not be a lot better as a very contentious shareholders meeting is coming up. My rationale for going long Bank of America rests on the tremendous spreads I see mortgage originators capturing in the current mortgage market, and with its acquisition of Countrywide Financial, Bank of America is one of the biggest players in that space. If you want to play that phenomenon, a safer bet is probably Wells Fargo, which doesn't have anywhere near the balance sheet issues of Bank of America. As for Citi, I decided to bail on it, dumping my options, for a very small gain.  That said, I do believe “there’s gold in them thar mortgaging hills.”

This Week: The Technicals & Fundamentals of it

Market Pulse

Six straight weeks now of gains for the Dow and we are now back to, and just slightly above, the magic 8,000 level of resistance.  All technical indicators for DIA (the exchange traded fund for the Dow) reflect a bullish posture: The short term trend is up.  The 10-day, 21-day, and 50-day moving averages are rising.  The MACD is bullish, and DIA is clearly under accumulation.  The only technical danger sign is an overbought condition.

The underlying fundamentals provide a least some reflection of the technicals.  The most salient feature of the economy now is that it appears to be at least stabilizing.  Whether this turns out to be a chimera and a feint for another leg down in the business cycle will depend heavily on two factors.

The first factor is a continued rise in the unemployment rate both nationally and in key states like my own in California.  If the Golden State is the canary in that coal mine, you can see how this Second Leg Recession might develop.

In the Golden State, unemployment has reached the double digits and the state government is flirting with insolvency.  If voters fail to approve a set of ballot measures that will further indenture their children to the childish overspending ways of Governor Schwarzenegger and his Democratic captors, the state will have to engage in further layoffs and forced “furloughs” which involve pay cuts.  These layoffs and pay cuts will represent a further contractionary shock for the state, and plunge it deeper into the funk it is now in.  Writ large across America, this is one danger, particularly since California represents about 15% of our national GDP and can take down other states with it.

The second factor that will weigh heavily on the global recovery is, as I have said several times in this newsletter, the fate of Europe.  We hear less and less about Europe in the news, but troubles continue apace there and it is difficult to parse that situation.

For now, the markets continue to rise off the deck they had been knocked down to.  My portfolio continues to be dominated by a coterie of 2011 in the money or near the money Leap call options involving Citigroup, GE, Delta, and Intel.  This week, I also added Bank of America.

I’ve never been one to go for big name companies like these, but in these times, I believe they may represent historic value buying opportunities.  Because of downside economic risk and to have more capital to deploy, I favor call options rather than the stock shares themselves -- focusing more on capital gains than dividend income.  (The one position of the group I have the least confidence in is Citi, but I got the options cheap.  I also believe the market got it wrong on Intel this last week.)

As a final note, I put about a decent chunk of my retirement portfolio in the Nasdaq several weeks ago and believe that tech will outperform the non-tech economy over time.

Market Pulse

Sorry for not sending the newsletter last week. Had a big trip back to the East Coast for a couple of speeches.

That said, we’ve got the Dow roughly back to where it was when I first said over a month ago that the Dow would fall from 8000 down towards 6000.  Well, it got as low as 6500 so that was a pretty good call.

And speaking of good calls, several weeks ago as the latest bottom was bottoming I speculated that taking some in- or near-the-money positions in January 2011 leaps in the likes of GE and Dupont might be prudent speculations.  So far so good on that.

As to why the market seems to be bullishly bouncing, the technical character of this market is now bullish, with Market Edge signaling an “Early Entry Buy” for the Dow and longs for both the S&P 500 and the Nasdaq.  Of the three, I like the Nazz the best and moved a chunk of my 401K into that a few weeks ago.

Our eternal question is whether the technicals are matched by improving fundamentals.  I think it would be most fair to say that while we are not seeing much improvement, we are seeing some stabilization in the economy. 

 Still, big questions continue to loom as US debt levels will be soaring, Europe remains the weak global sister, and Asia is likely to escalate its beggar thy neighbor practices to boost its fortunes.

BUY DELTAI’m introducing a new YouTube feature this week called “NavarroStrategies.”  The inaugural video analyzes the airline sector and concludes that Delta might be the best bet of a highly speculative lot. 

Check out this new feature at http://www.youtube.com/navarrostrategies.Let me know what you think!!!!

Bottom Line: If you did your homework while sitting on the sidelines in cash, now is the time to start cautiously building some positions….  I like GE, Intel, Dupont, and Delta for now plus the Nazz.  Just be ready to cut your losses and run quickly if it all starts to go to dung again.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

ALERT: Watch Navarro on CNBC Monday, March 30th, between 11 and Noon Eastern Time.  China segment….

This Week: The Road to Recovery Runs Through Rome

 Market Pulse

The scariest thing I read in the newspaper this last week was a story in the Los Angeles Times. On the front page, the article pondered whether small retail investors should get back in the market to take advantage of the latest rally.

That kind of story is scary because retail investors are often the ultimate contrarian indicator. If they are chomping on the bit to get back in the market, it may not be long for the smart money pulls the plug and fleeces them yet again.As for the electronic media, the thing that I find most interesting about watching the pundits on the tube now is how excited so many of them are getting about a “rally” which has not even gotten us back above 8000 on the Dow.

For me, the market must decisively break through that barrier on heavy volume in order for the current sideways pattern to be broken.Sideways pattern? What the hell are you talking about Navarro? The market has been shooting almost straight up. 

Yes, it’s been shooting up now. Just like it shot down when it fell through 8000 on the Dow.  But look at the chart.  The old support level of 8000 on the Dow has become the new resistance.

This is not to say that this latest rally has not been a great trading opportunity. As you read here in this column several weeks ago, GE, for example, was a great buy at eight dollars.  I also opened up positions using call options (2011 leaps) in Intel, Delta, DuPont, and Citigroup early in this latest “ rally.”

The broader point here for my sideways caution-- and this is a column based on macroeconomic analysis -- is that the market has been responding fairly robustly to the ever increasing trillions that the Congress, the Federal Reserve, and the US Treasury Department are injecting into the system. What I am watching, however, is a bit more than this US money making (and debasing) machine.

What intrigues me the most in all of this economic recovery puzzle is the Eurozone. The news is decidedly not good. The latest manufacturing data, as reported in the Financial Times, indicates the total “collapse in manufacturing orders in January.” This was the biggest monthly drop since bureaucrats began collecting data in 1996 on this parameter.

The only good news about this is that inflation is also falling faster than expected, which opens the door to a 50 basis point rate cut by the European Central Bank. The only question now is whether Europe can drive down its currency faster than Ben Bernanke can drive down the dollar.

The point of all this is that any global economic recovery ultimately must run through Rome and the rest of Europe.  Why?  Because European demand for Asian and American exports, as well as for Brazilian and Russian commodities is essential to recovery. And I’m just not seeing it. What I love about the Europeans as they struggle with all of this is that they areso much damn smarter about economics than the Americans. 

For example, the Czech prime minister last week accurately condemned American economic policy as “a way to hell.” German Chancellor Angela Merkel was a bit more intellectual about it but essentially said the same thing:

“The crisis did not take place because we were spending too little but because we were spending too much to create growth that was not sustainable. It isn’t just that the banks took over too many risks. Governments allow them to do so by neglecting to set the necessary financial market rules and, for instance in the US, by increasing the money supply too much.” 

I for one would take a swap straight up now of Angela Merkel for Barack Obama and Jean-Claude Trichet, the head of the European Central Bank, for Ben Bernanke.

Bottom Line: Watch for the Dow to break decisively above 8000 before you get too carried away on the bullish side.  Pay attention to what happens beyond our parochial borders.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

This Week: Obama’s Confederacy of Economic Dunces

 Market PulseHere's a riddle for you: What is the most common question you hear posed from the talking heads during a sideways market? The answer, of course, is this: "Has the bottom been put in?"

After a gut-wrenching ride down to the likes of 6500 on the Dow, US markets rallied over the last several weeks and a gaggle of traders skimmed another few billion from the sheep. Now, with the rally encountering turbulence, everybody wants to know whether this is a pause in the bullish action or simply another oscillation in the sideways pattern.

My speculation is that we are likely still in the sideways pattern; and it is a speculation based on the continuing obstacles faced by the Obama economic team. Most flummoxed of all about these obstacles is the president himself. He is a problem solver and he seems quite perplexed by the continuing rain of bad news that keeps pummeling the White House roof. Perhaps that's why he is always jetting off in Air Force One to parts unknown.  (Memo to Barack: Stay in the Oval Office until further notice -- your charm wears thin.)

On the economy and the president, loyal readers will remember that during the campaign, my biggest beef with Obama was his lack of any macroeconomic training. Given that I teach this subject at business school and given that I've seen thousands of really smart people pass through my classroom over the years have a really hard time understanding this stuff, I don't have a lot of confidence that even someone who is as quick a study as Barack Obama will be able to master the intricacies of the macro economy anytime soon. That means that Obama will remain at the mercy of his team of advisers and while they are all smart, none of them are as smart as they think they are or need to be.

The Princeton Guy
Let's start with Federal Reserve Chairman Ben Bernanke -- the Princeton guy. Loyal readers will also remember that when he got appointed, I predicted, quite presciently as it would turn out, that Helicopter Ben would wind up to be the biggest fall guy in history for Alan Greenspan. When I failed to anticipate is just how bad Bernanke would be in his own right. I just figured that here was a smart guy who would be left with an impossible situation; but at least he would figure out the best way out of that bad situation. Never did I imagine that Bernanke would make the situation so much worse.

Not only did the Princeton guy help create the massive housing bubble with his easy money policies. He has now set the stage for the most comprehensive debasing of our currency the United States has ever witnessed. The even bigger problem with the debasing of our currency is it's "beggar thy neighbor" nature. Every time that Bernanke cut interest rates on their way down to near zero and NOW every time the “quantitative easing” Bernanke increases the money supply further, the dollar falls further.  The story does not end here.

Because China manipulates its currency, the Chinese yuan falls with the Bernanke buck. Essentially, that's a beggar thy neighbor screw job from the US and China for everybody else in the world trying to get out of their economic woes.  Whether it be Europe or South Korea or Japan,  a falling dollar and yuan makes it that much harder for these other regions and countries to export.

Meanwhile, as I tried to explain to Larry Kudlow (unsuccessfully) several weeks ago on CNBC, the cheapening  dollar drives oil prices back up to strangle economy. This is insanity. Where is Paul Volcker when you need him?

The Harvard Guy

Now what about the Harvard guy -- Larry Summers? I was getting my PhD at Harvard during 1980s when the young wunderkind Larry was regularly walking on the Charles River, even when the Charles wasn't iced over. The word you always here to describe Summers is "brilliant." Sure, he’s smart. But he now is doing the job even a village idiot could do after you gave that idiot a few hours of training in Keynesian economics.

Plus, every time the guy gets on a news show and starts talking about the economy, everybody watching feels worse.

This is the kind of guy the president needs to lock up in an office and feed once a day and let him write  his daily memos for staff.  He should not be put in charge of anything. He should not be put in front of any TV cameras. He should not be allowed to brief anybody because he simply is am intellectual bully who overwhelms people with the power of an intellect which, as powerful it is, is simply not up to the job.

Captain Queeq

Now how about our Treasury Department Secretary Tim Geitner. Riddle me this Batman. Why do I think of Captain Queeg every time I see Geitner on the tube? Wait, I have just insulted Captain Queeg because even Queeg seemed more relaxed than Geitner.

To be fair to the man, Geitner has an impossible task and it is a task made all the more impossible by the fact that most of the key staffing post at the Treasury Department remain unfilled. That, by the way, is the president's fault -- not Geitner’s.

My bottom line here is that throwing a few trillion dollars and economic crisis is not leadership. It's desperation. The financial markets smell that desperation; that accounts for the downside pressures in the sideways market pattern. At the same time, with all the money washing into the system, the financial markets also sense at least a short term opportunity. That accounts for the upside pressures on the sideways market pattern.How that plays out in the markets is the proverbial crapshoot.

My approach now to trading this market is to keep a lot of my ammunition in cash. Meanwhile, I've begun to build a few positions that I think have some upside potential.For example, I bought GE eight dollars, sold it for a little over $10, and then rolled over my profits into some January 2010 calls with a $12.50 strike price. In the worst-case scenario, I lose the house money.  At the same time, I bought a bunch of 2011 calls for Citi with a $5 strike price. I like this trade because the calls were cheap, the downside risk has been defined, and the upside is enormous if Citi takes off.

Bottom Line: This continues to be a short-term trader’s market right now.  Be like Jack -- nimble and quick.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

This Week: The Canary Lives, China Humiliates

 Market Pulse

Last week, the US stock market found a bottom -- with a nice double-digit gain for both the Dow and S&P 500. The question, of course, is whether it is the bottom.

he best part of last week's action was the role that Citi played in the rally. News that the credit behemoth is once again turning a profit provides a "canary in the coal mine" signal that the credit market canary may yet live. I have maintained for a long time that the most important key to recovery in the global meltdown is recovery in the financial system. Once that happens, the lubricant of credit can begin to work its magic both for consumers seeking to buy big-ticket items and businesses seeking to engage in the kind capital expenditure activity that will be necessary to bootstrap this economy.

Obviously, big questions remain; and they are the kinds of questions that need to be addressed not by any single country but rather by gatherings such as the G-20 which are going on even as I write this missive. One of the biggest issues facing this gathering is what to do about the meltdown in Europe, which I have commented on in previous newsletters. The size and timing of the European fiscal stimulus is at the top of the list along with how much more funding the IMF will be given to dole out to the rest of the world. Germany remains the key -- how far will it be will to go in helping its neighbors and how much inflation will it be willing to risk.

With all of this in mind, I am not yet ready to go long the broad market indices. That said, I have begun to accumulate shares in GE for two reasons. 

Buying GE and Dupont

First, among all the companies dragged down by the exposure to financial derivatives, GE is the only company that has a broadly diversified engine of production and growth. If GE can withstand the magnetic pull downwards of its derivatives exposure, it will be an incredible long-term value.  Second, as a price under ten bucks, I view GE not as a stock but merely as a call option. As with any call option, I am prepared to lose most or all of my investment because the potential upside reward far outweighs the downside risk.

One other company I think may have more upside than down is Dupont (DD).  Dupont is one of the best managed companies over the course of the business cycle and it is near its 52-week low.  Layering in is preferable to all in.

China Embarrasses the United States

With China holding about $2 trillion of American assets, they should be rightly concerned about the value of those assets. It was embarrassing for the United States, nonetheless, for the Chinese Premier Wen Jiabao to publicly question the solvency of the US government. That is precisely the kind of embarrassment the country is likely going to have to get used to until our government gets off its knees and stops begging for Chinese money to pay for its budget and trade deficits.

In many ways, it is a delicious dilemma that the United States now puts China in. If China refuses to keep buying our bonds, the value of the dollar will plunge, and so, too, will the value of China's foreign reserves held in dollars. On the other hand, if China keeps buying our debt, it faces a strong likelihood that with so much fiscal stimulus and easy money coursing through the US system, inflation is all but inevitable. That, too, will ultimately devalue the dollar and Chinese assets. So, for the Chinese, the question is whether to cut and run now or hold on and be scalped later. Of course, the problem with the United States getting the last laugh on the Chinese is that it's predicated on turning our currency into worthless paper. Stay tuned

Bottom Line: As I said last week, this continues to be a short-term trader’s market right now.  BUT plot your Long Strategy now for when a bottom is finally discovered.  GE and DD are my opening gambits in my own strategy.  Obey standard money management rules and quickly cut any losses.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

This Week: The Death of Health Care, Carbon Taxes, & Card Check

Market Pulse
In this newsletter, I will briefly comment on the current state of the markets, discuss some very significant political implications for longer-term stock market trends, and finish up with a quick analysis of an appearance I had on CNBC last week that I got a lot a reader comment on.

The market story continues to be a short story -- literally. As faithful readers know, three weeks ago I called for the Dow to head toward 6000 and shortly after that I suggested that a next logical stop for the S&P 500 is 650. The market's downward trend towards those goals remain in place for all the reasons I originally gave:

• The global economy continues to deteriorate, particularly in Europe, so export demand won't be the savior.
• The Obama administration's policies have been a failure. The fiscal stimulus doesn't adequately stimulate in the short run. The banking system bailout hasn't stopped the credit market bleeding.

To these two reasons, I now add a third -- as well as a new prediction -- in the wake of the disastrous jobs report last Friday. Now that we have had the most rapid job loss over the last six months since the end of World War II, these lost jobs will put in motion a ripple effect. Laid off workers will consume less and the economy will further contract. My prediction is that the unemployment rate in the US will reach double digits, possibly as early as this summer and may hit as high as 12% -- the modern version of the Great Depression.

Market Politics
In the last few weeks, it has become abundantly clear that the Republicans are far more effective as the minority party than the Democrats. Because this is so, the Obama Administration can likely forget about any real reform in health care and any progress on a cap and trade program and global warming. The Democrats may also be unable to deliver the biggest promise they made to the labor unions -- so-called "card check."

What these three issues have in common is an extreme vulnerability to the Republican critique that addressing these issues now would further plunge the economy deeper into a recession by increasing costs on the economy. This is a very potent argument that has huge implications for the stock market and particularly for companies in sectors related to healthcare or which are heavy carbon emitters. Stay tuned.

CNBC’s Pardon My Interruption

I got a lot of e-mail responding to an appearance I made on a CNBC show called The Call last week. Many readers were upset at how I got abruptly cut off by one of the anchors while addressing a key issue related to the markets right now.

Specifically, on the show, I was asked whether a firming up of the oil and commodities markets was a bullish sign. My response was that, in fact, it was a bearish sign because all it reflected was the weakening of the dollar associated with market concerns about our huge fiscal stimulus and bailout.At that point, one of the anchors jumped all over me and asserted I was dead wrong because the dollar was at a "four year high."

To set the record straight, I'll end this newsletter with an excerpt from Business Day run on March 7, 2009 that factually supports my argument.  Draw your own conclusions.  “Crude oil rose to a five-week high as the US dollar weakened against the euro, increasing the appeal of commodities as an alternative investment.  Oil climbed 4.4% and the dollar weakened versus the euro after unemployment advanced to the highest in 25 years in the US, the world's biggest energy user.”

Bottom Line: This continues to be a short-term trader’s market right now.  BUT plot your Long Strategy now for when a bottom is finally discovered.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

This Week: Dow 6000, S&P 650?? -- The Bottomless Bottom

Market PulseMy call for the Dow to continue its downward trend to as low as 6000 is still in play. To this, I add the speculation that the S&P 500 may be headed down to 650.The biggest concern I have about both the Dow and the S&P 500 from a technical analysis point of view is that there is absolutely no discernible levels of support.

From a technical point of view, we are truly in uncharted territory. We are literally staring into a bottomless bottom. At present, my favorite technical analysis website Market Edge has both SPY and DIA as short sells. For each exchange traded fund, all of the relevant moving averages -- 10-day, 20-day, 50-day, and 200-day -- are pointing downward while both funds are under distribution. Moreover, SPY has experienced a Point & Figure double bottom breakout, reinforcing the idea of a bottomless bottom.

One of the central tenets of my approach to stock market analysis is that every technical analysis pattern can be explained by an underlying macro fundamental story. In this case, both the Down and S&P 500 continue to head downward because there is no end in sight for what is likely to be a very long and very deep recession global in scope.Here are the major factors that may help continue to push the Dow and the S&P 500 down to historic lows.

1. Incompetent Obama Administration economic policies: We already know that the fiscal stimulus does not provide enough short term stimulus and may be highly inflationary over the longer run.  The big remaining uncertainty is whether Obama's Treasury Secretary can stabilize the banking and credit system. Thus far, there is no evidence that Tim Geitner’s half-baked, semi-nationalization approach is working. Stay tuned on this one.

2. The Collapse of the European Union: To be clear, we care about this possible collapse because a weak Europe translates into weak demand for US exports. Plus, to prevent this collapse, the euro will have to tumble relative to the dollar and this will further undermine US ability to sell exports.As to why the collapse may be coming, there are two possible flashpoints.  First, there is the Profligate Five -- Ireland, Greece, Spain, Portugal and Italy.  The danger here is a bond default in one or more of these Eurozone countries that would require intervention by the European Central Bank, drive down the value of the euro, and possibly trigger bank runs in other European countries as default fears mount.

Second, there are the Eastern European Basket Cases -- including Latvia, Estonia, Lithuania, Hungary, the Ukraine to name a few.  The problem here is that a lot of these countries borrowed in euro-dominated instruments, e.g., mortgages for homeowners, and now their own country currencies are collapsing.  This is dramatically raising their debt burdens and increasing the risks of default.  Banks in countries like Austria and Sweden are way on the hook.

(To understand this problem, suppose your own home mortgage was in euros and the dollar plunged.  This would make it much more expensive for you to pay back your mortgage because you would need to exchange a LOT more of your dollars for euros.)

Last take on Europe: If Eastern Europe collapses, look for Russia to try and come back in and reassert its dominance.  If Europe collapses, look for a new generation of demagogic Hitlers and Mussolinis to vie for power in a democratic system.

3. The Rise of ProtectionismThe kneejerk reaction of countries around the world to this crisis is “beggar thy neighbor” tariff hikes, currency devaluations, and “Buy the Home Country” legislation.  This is very dangerous.For the U.S., the biggest danger may well be that the climate will not allow the U.S. to address legitimate free trade issues with China in particular on China’s well-known propensity to pound the American industrial base with a cheap, undervalued currency and massive illegal export subsidies.   Unless the U.S. fixes its trade imbalance with China, there will be no recovery of America’s industrial base and therefore no long term recovery.

4. Asia Meltdown: So far, Europe appears to be the much weaker sister than Asia, but at some point push is going to have to come to shove in Japan, Taiwan, and South Korea -- all of which are being eclipsed by China.  The big plus going in this sphere is the horde of foreign reserves that China sits on that will cushion it somewhat from the global downturn.

Bottom Line: Volatile is as volatile does.  This is strictly a short-term trader’s market right now.  BUT plot your Long Strategy now for when a bottom is finally discovered.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

Week Ending February 27, 2009                    Volume14, Number 7               

This Week: Malign Neglect & Santelli for Treasury Secretary

Market Pulse Market Wrap: 10 days ago I raised the spectre of a Dow 6000 on CNBC. Now, we are one third of the way there, and the trend remains down. I continue to advise cash and warn anybody not to get sucked in to the latest Gold Rush. Now, here's what's on my mind:

China Rising AgainThere certainly was a lot to be angry about with respect to the Bush administration. However, one of the biggest things that really ticked me off is something that hardly anybody seemed to notice. This was the malign neglect of the Bush administration with respect to the rise of China. Between 2001 and 2008, China just kicked America's ass in the international marketplace, largely because of China's set of unfair trade practices, most egregiously its massive export subsidies and currency manipulation. Blinded by its own free-market ideology and grandly distracted by events in the Middle East, Bush & Co. almost single-handedly dismantled the American economy and left invulnerable to the mess it is in by ignoring China policy.

Now, my worst fear about the Obama administration is that it also will be grandly distracted by its own financial version of Baghdad and fail to realize that any long-run road to economic prosperity in the United States must travel squarely through a reform of US-China trade relations. To put this argument most simply, America's economy cannot recover over the longer-term without a strong industrial base, and America can't develop a strong industrial base as long as China keeps cheating in the international trade arena.

Exhibit A of this problem and this administration's malign neglect of the China issue is the news of a government-orchestrated consolidation of the Chinese iron and steel industry. This consolidation will make the industrial policy days of Japan, Inc. look like Halcyon days of Adam Smith. I can't tell you what a serious threat this latest manifestation of Chinese protectionism is likely to pose to this country.Over the past six years, the Chinese steel industry has been growing at an unbelievable pace. Any damn fool, except those running the Bush administration, could have seen that coming glut in Chinese steel and the threat that glut would eventually pose to our own industrial base and domestic steel industry. However, my guess is that the Obama administration won't even register this latest China event on its radar screen, distracted as it is by the worsening economy and its own stupid missteps.

And speaking of stupid, White House Press Sec. Robert Gibbs has got to get the award of the week -- and possibly for the year on the stupid front. In a press conference briefing, Gibbs called out CNBC analyst Rick Santelli and accused Santelli of not "understanding" the latest piece of legislative crap from this administration.I've never personally met Santelli, but I can tell you this. Of all the financial market commentators on the air, he is damn well the smartest; and anybody who accuses him of disagreeing with them on the grounds of a lack of understanding of an issue is living on another planet. What the hell does Robert Gibbs know about the financial markets anyway? If that dude had to make his living trading options in the Chicago pits, you would've vanished into thin air long ago.

As for Santelli, he is the only commentator I know that I would trust to manage my portfolio. And one more take on Santelli: I regularly use video clips of him when I teach macroeconomics to MBA students at the University of California-Irvine. I use these clips because they often show the most sophisticated form of analysis -- precisely the kind you need to understand the complex relationships between economic events and financial market movements.

I'm sure that John McCain could not be doing any better as president than Barack Obama. It was clear from the campaign that McCain did not have a very deep grasp of economics. It is extremely troubling however that Obama and his economic team are having such a difficulty getting traction. I for one never thought that Larry Summers walked on water at Harvard. Read his stuff and it is straight out of a Keynesian textbook -- nothing particularly flashy or brilliant.

As for Treasury Secretary Tim Geitner, if you want a really good comparison, go take another look at the movie The Caine Mutiny.   Captain Queeg Geitner is simply too tight when he gets on TV and therefore does not inspire any confidence. Nor do his policies, at least yet.If I had any advice for Barack Obama, I would tell him to quietly arrange a meeting with Martin Feldstein and Rick Santelli. Between the two of them, maybe they could straighten the White House out.Please forward this newsletter to a friend!

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week: Dow 6000?

Market PulseI did an interesting segment on CNBC's "Squawk Box" last Friday about the possibility of the Dow hitting 6000. Below are the notes I made in preparation for that segment. They reflect my concern about the failure of the Obama administration to deliver a well-targeted fiscal stimulus and a coherent bank bailout plan. Juxtaposed against the continued deterioration of the global economic environment, this failure does not bode well for the markets.  To view segment, click here or go to:http://www.cnbc.com/id/15840232?video=1032414845&play=1.DOW 6000 CNBC Talking Points

Intro: Navarro uses a combination of “macro” fundamental analysis and technical analysis to handicap the market direction and trend. Using this approach, Navarro accurately called the top of the stock market in October of 2007 (issuing a call to cash in November 2007). Since that time, he has accurately characterized the market to be first in a downtrend and then in a sideways pattern and urged risk-averse investors to remain in cash.

·         Since rebounding from its low in November of 2008, the US market has been in a sideways trading pattern while the Dow Jones industrial average has held a strong support level at 8000 -- until recently.

·         This technical sideways pattern speaks to an underlying fundamental analysis truth: The failure of the market to establish either a bullish or bearish trend reflects the market's uncertainty about both the severity of the current global downturn and the ability of policymakers to engineer a recovery.

·         Currently, both US policymakers and policymakers around the world are in a race against time: The global economy is deteriorating at an increasing rate. In the thus far vain attempt to stay ahead of this recessionary tide, policymakers are increasing their various fiscal and credit market fixes at an increasing rate. So far, recession is triumphing over Keynesian solutions.

·         Two concerns about the Obama administration's plan now trouble the markets. One concern is that the fiscal stimulus-bailout will be too little too late to stem the recessionary tide. Equally troubling is the concern that the massive size of the policy solution will lead to a debased currency, soaring inflation, and spiking interest rates down the road. Neither scenario doth a bull market make.

·         That the Dow has broken through a critical support level now that both the fiscal stimulus package and the bank bailout are in place is an extremely ominous sign. With that support level broken, the downside risk is substantial.

·         If the global economy continues to deteriorate at the rate it is doing so, a Dow at 6000 has gone from the unthinkable to the quite plausible. Remember: All stock prices reflect is the expectation of the future stream of earnings. If investors now believe the recession is going to be longer and deeper than they believed yesterday, stock prices must resume their downward trend.

·         Watch carefully than to see if the Dow can at least regain its sideways movement. If, alternatively, the Dow resumed its downward trend, 6000 here we come.

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The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

                                      This Week: Overreact, Overthink

Market Pulse

The Obama Administration is overthinking the current recession because, in a panic, its economic team sees no light at the end of the recessionary tunnel. This is despite the fact automatic stabilizers such as falling energy prices, falling home prices, falling interest rates, and diminished wage pressures are already beginning to reinvigorate the economy. Accordingly, the Journal's editorial is correct that the Obama fiscal stimulus package is way overdone. The only fiscal stimuli that should be considered are ones that can get right into the pipeline through the rest of 2009 and ones that stabilize the housing market.

This observation leads naturally to the concern that the Obama administration is likewise overreacting to the credit crisis. This crisis does not require massive loan guarantees, big bad banks, or, the deity help us all, nationalization. Instead, the crisis really requires only one solution: Reducing the rate of home foreclosures. Most of the toxic assets on bank balance sheets represent mortgages gone -- or going -- bad. Focusing singularly on stability in the housing market would go a long way towards restoring these balance sheets and opening back up the credit spigot urgently needed by American business.

Accordingly, it will be exceedingly interesting as to how the bond market reacts first to the fiscal stimulus and then to the Big Bang solution to the credit crisis scheduled to come out this week from the Obama administration. At the long bond dives in price and goes up in yields, that's a big bet that the Big Bang will be highly inflationary.

The Russian Bear Ascendant -- China Under the RadarNow let us shift gears, and allow me to wax semi-eloquent about the tragic consequences of both our media and our new president ignoring foreign affairs as they hyperventilate about the domestic economic situation. For me, this is déjà vu all over again.During the Bush administration, the President never paid any attention to the rise of China and Russia and the fundamental realignment of the global economy because it was obsessed with war in the Middle East. Now, the new administration is clearly distracted by events on the domestic scene even as significant events continue to unfold beyond our borders were the immediate attention.For example, Russia is clearly seeking to do strategic damage while we are distracted. Messrs. Putin and Medvedev wants to put naval and air bases on the shores of the Black Sea in a breakaway Georgian province -- a provocative act if there ever was one. Russia has also successfully managed to bribe government officials of Kyrgyzstan to toss out the US air base in its country. Meanwhile, Russia is trying to form an alliance with the Central Asian republics that would be NATO-like in projecting Russian influence throughout the region.Meanwhile, neither the media or the administration is paying much attention at all to China, which is suffering its worst drought in five years and is grappling with increasing political unrest. At a minimum, the drought is likely to have a sharp effect on food prices down the road while any political unrest in China is likely to spill over by a Chinese behavior on issues like Taiwan.Last take: The unfortunate "Buy America" provision in the fiscal stimulus package obscures very important issues related to the fairness of trade between United States and particularly China. This kind of provision merely provides the supporters of free trade any cost with the opportunity to wave the red flag and bloody shirt of protectionism. How stupid can Congress be? Oh wait, we know the answer to that question. Very.

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!  

 

This Week: The Big Bang

 Market Pulse

This week, we can all look forward to the "Big Bang." This is the eagerly anticipated range of measures the Obama administration is going to announce to solve the credit crisis and provide relief to homeowners facing foreclosure.

Whether the term "Big Bang" is ultimately going to refer to the creation of a new more healthy financial universe or something done dirtily in the dark to taxpayers remains to be seen. Regardless, I do expect a market rally on the policy news that should be propelled by the financial sector and perhaps even homebuilders.

Watch any Big Bang rally that may materialize very carefully. If the rally holds, it could mark a turning point in the economy by signaling appropriate policies are now in place. However, if my forecast rally fails, we are likely to be in for an exceedingly long haul down the recessionary road.

Readers of this column will know that what worries me the most about the current situation is not the state of the United States economy but rather the basketcase countries of Europe and Asia. In Europe, the troubles in Ireland, Spain, Great Britain, and elsewhere are likely to weigh very heavily on the continent. In Asia, former dragons like Singapore and Taiwan and South Korea are experiencing an unprecedented implosion that makes the 1997-98 Asian financial crisis look like a cakewalk.

My bottom line this week: Day traders and swing traders get ready for some very interesting volatility on the Big Bang news. And look for analysis of the actual policies we wind up with in this newsletter in the coming weeks.

Last take: The failure of the Obama administration to win a single Republican vote in the House of Representatives on its fiscal stimulus bill is reminiscent of the Clinton administration's failure to win Republican support for its tax hike when it took office. That tax bill, of course, set the stage for the Gingrich revolution. This time, Republicans are playing a very dangerous game by refusing to vote in favor of the stimulus. That said, shame on Harry Reid and Nancy Pelosi and Barack Obama for letting that Christmas tree of a bill ever get to the House floor.

On this point, one would do well to remember that the vast majority of members of Congress, particularly the House of Representatives, are far more skilled at raising money from special interests and pressing the flesh than actually doing the people's work. Marginal intelligence coupled with suspect ethics is a lovely recipe for pork bill politics. Memo to the Democratic Party: this is the worst crisis we will have in our lifetime. Please get the fiscal stimulus right. You are off to a very very bad start.

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