The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: Cost-Push Inflation

STOCKS

The DJIA, Nasdaq, and S&P 500 all remain in a strong technical position despite broad macro-fundamental headwinds.   The big debate now is whether a bottom -- or a false bottom -- has put in.  You can argue it persuasively either way – which means it’s a tossup from a risk/reward perspective.  That, in turn, means that cash still remains king unless you are a very short term trader.

BONDS

After more than two decades of a bull market in bonds, we may now be entering what is likely to be a long term bear market.  The culprit is “cost push inflation” putting upward pressure on yields and downward pressure on bond prices.

Like “moral hazard,” which became the pundits’ favorite buzzword in the midst of the credit crunch, “cost push inflation” will be fashionable on the tube and in the papers over the next some months.  Cost push inflation comes from increases in the prices of production inputs like energy and natural resources.  It may be distinguished from “demand pull inflation,” which is too much money chasing too few goods when an economy is growing robustly.

Demand-pull inflation is easy to cure.  The government  just raises taxes or interest rates. This triggers a contractionary shock and this type of inflation eases as economic growth slows.

Cost-push inflation is a totally different matter.  The worst case scenario is when you have cost push pressures AND a slowing economy.  That’s the “stagflation scenario.”

Right now, cost push pressures are building throughout the world.  The deflationary basket case of Asia – Japan – just saw the first rise in core inflation since 1998 because of non-core elements creeping into the core.   Not surprisingly, this inflation news triggered the worst one-day fall in Japanese bond prices in five years as yields rose significantly.

The Big Picture

It’s easy to get lulled into a false sense of security with the U.S. stock market indices bouncing nicely up.  However, there are too many damn and disparate pressures building in the U.S. and globally to get really comfortable with any bullishness.

• Much of Europe is facing strong inflationary pressures even as Spain and Italy circle round the fiscal profligacy/housing bubble drain.

• Much of what we used to call the “Third World” is suffering from high food prices and protests – with a ripple effect of government interventions bound to totally screw up world grain markets. .

• China and Vietnam are experiencing their worst inflation crises in decades.  Remember that Tiananmen Square was not about democracy but inflation.

• The U.S. consumer continues to fade out of the picture, making a quick recovery all the more uncertain.

• OPEC won’t produce more, Russian production has begun to fall, and Venezuela provides a textbook case in how nationalizing oil production winds up reducing production and revenues.

• Talk of nuking Iran continues to heat up in the face of Iranian nuclear proliferation.

I could go on…but you get the idea.

QUICK TAKES

1. A week after my lament about Peggy Noonan’s column was relegated to the WSJ back pages, she gets put on the main editorial page for the week.  The irony is that it was her worst column of the year.
2. My over-arching point on the Clinton-Obama dustup is not about which candidate would be a better president.  It has simply been that Obama, with his inexperience, is going to get easily ground up by the Republicans leading up to the November election.  That this SHOULD be a major concern to even the most ardent Obama supporters should be evident in the various events of the last few weeks and the hits Obama is taking.   Super delegates take note.
3. Dem Chairman Howard Dean is causing a lot of Dean-like screeching on the Obama side of the ledger.  In a Financial Times interview, Dean was quoted as saying the super delegates should vote for whoever has the best chance of winning the November election – not who wins the most regular delegates or popular.  That’s a sharp counterpoint to Nancy Pelosi’s dictum.
4. Keep your eye on CYD, China Yuchai.  It was one of my picks last week on CNBC.   Nice story stock about diesel provider of choice in China.
5. How about we wake up and stop subsidizing the use of corn to produce fuel.  It’s a net negative on both fuel efficiency and environmental grounds.

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

This Week: The Bounce is Back

The technical bounce is definitely back after a brief GE derailment several weeks ago.  Momentum, sentiment, and strength indicators all favor the long side.  I don’t recommend being long this market, however, unless you have a very short term horizon and can turn on a dime.  Storm clouds continue to pile high in the sky.  Cash remains king.

In other notable market news, China’s Shanghai market hit a milestone of sorts, falling to half its  value relative to last October’s high.   While the stock market is usually a leading indicator of a country’s economy, China’s fall from bullish grace tells us little because it is due almost entirely to classic bubble bursting activity.

And what was the most bearish news of an otherwise bullish week is a significant spike in the Libor rate, which is used to adjust a lot of debt instruments, including adjustable rate mortgages.  Libor spiked 20 basis points last week and this spike rippled through the bond and futures markets.  To understand its bearish implications, think of a Libor hike as a tax hike on homeowners and corporate borrowers.

Special Notes on the Food Crisis

One of the few special interests that love food crises like the current one is my clan of economists.  This crisis provides an absolute textbook case about how screwing around with the free market typically just makes things worse:

Consider first the effect of grain export bans.  Egypt, Vietnam, and Indonesia, among others, have slapped restrictions on rice exports.  Kazakhstan has halted wheat sales.  Malawi has suspended sales of maize.  And so it goes.  Export bans drive up prices in international markets for three reasons:

1. Available supply in world markets is reduced
2. Rising prices and the fear of shortages create demand over and above what it would otherwise because governments try to buy more grain to increase stockpiles.  Increased demand drives up prices further.
3. The ensuring panic creates “phantom demand” as traders order more than they otherwise might to insure order fulfillment in a supply constrained market.

Consider next the effect of export tariffs like in Argentina.  This effectively reduces the price that farmers can get in the marketplace.  Farmers plant less than they otherwise would, reducing supply.  This increases price pressures.

Consider finally the effect of export restrictions on inputs into the farming process like fertilizer.  China, for example, has slapped a 100% export duty on fertilizer.  This reduces prices to domestic producers who will produce less.  It increases fertilizer prices in world markets, which put cost-push pressures on final grain products.

Oh, and let’s not forget how subsidies to biofuels are putting upward prices pressures on everything from seeds and fertilizers to grains.

Madness, I say.  Madness….

QUICK TAKES

1. Whenever I want to read modern American literature, I don’t go for Hemingway or Faulkner.  I just take in Peggy Noonan’s column that is buried deep on the back pages of the weekend WSJ.  Nice little piece this week on why over half of America now doesn’t trust Hillary and what Barack is likely going to lose not because of his skin color but his inexperience.  Take it all in with a grain of salt as she’s a rock-ribbed Republican.  Still, she makes Ann Coulter’s purple prose look like it comes out of the Kindergarten bin.
2. And speaking of Hillary, she’s been the only candidate in either party to get it right on China – going after the People’s Republic of late on everything from human rights to currency manipulation.  So it is very troubling that all she gets for her truthsaying is the resignation of one of her top China hands, UCLA political scientist Richard Baum.   My guess here is that Baum was taking a lot of gas from his colleagues at UCLA’s Center for Chinese Studies, and its always hard to get an appropriately hard line from any academic operating out of such centers because of the funding imperative.   It would be nice if another member of Clinton’s inner China circle, Susan Shirk, stood up for her to offset this bad press.
3. See my letter to the editor in the weekend edition of the WSJ re: Greespan.  It begins thus:

 “The maestro doth protest too much. In fact, Mr. Greenspan's spirited defense of his legacy has more in common with revisionist history than two essential truths: He may legitimately be blamed for both the 2001 recession and the (likely) current recession, as well as the collapse of the tech bubble and formation of the housing bubble.”   Click here for full letter.

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

60 Minutes Alert: If you missed the April 6^th show, you can catch it on the web by clicking here.

This Week:  GE Whiz That Hurt

Last week, I noted that the U.S. markets had pulled off the Houdini of a strong technical bounce in the face of an ever-tightening fundamental stagflationary squeeze.   As it has now turned out, this may be one of the shortest bounces in recent stock market history.

The technical bounce got absolutely crushed by bad news from the bell weather General Electric, which suffered one of its worst one stay stock price losses in its entire history on missed earnings and lowered guidance.  Given that GE is almost its own ETF for the U.S. economy, this news hit the markets very hard.

Where does this leave us?  From my macro perspective, the U.S. markets remain in a downward trend that will be very difficult to reverse and even more difficult to trade on the long side.  Cash continues to be a good place to park your bucks – unless you are really good at picking biotech stocks, which are largely outside the business cycle bear hug.

More broadly, I continue to be amazed by the parade of ominous signals emanating from seemingly all parts of the globe.   Oil topping $112 bucks and $4 a gallon summer gasoline on the horizon.  Airlines dropping like Chapter 11 flies.  Spain forced to import water because of record drought.  A billion of the world’s poorest facing starvation as food prices spiral upward and many food-producing countries slap on export restrictions.  Iran moving full speed ahead on uranium enrichment.  Rising risk spreads signaling a resurfacing of worries over a world credit meltdown.  Mugabe thugs in Zimbabwe making a mockery of democracy.  A young punk Iraqi mullah studying Allah knows what in Iran unleashing yet another wave of violence killing U.S. soldiers and exposing the surge’s feet of clay.  Tens of thousands of high-paying Wall Street jobs turned into pink slips.  Las Vegas dying on the recessionary vine.  Consumer sentiment at a 26-year low.  It goes on and on.

QUICK TAKES

1. Yet more hate mail from the Obama-ites over my latest oped on the “unity ticket.”  Click here to read it.  It’s damn comic irony that these Obama zealots hurl the worst sort of epithets my way in praise of a candidate they describe in the same breath as a facilitator, unifier, and master politician.  And by the way, if you want to ready my memoir about being in San Diego politics, click here.  It’s yet another freebie from yours truly.
2. Now here’s some more stuff for you Obama-ites to chew on: John McCain just absolutely crushed both Hillary and Barack on American Idol.  Each had 60 seconds to address the largest TV audience this side of Beijing.  McCain was just very warm and funny and loose.  Meanwhile, Barack eyes darted back and forth like a hamsters as he read his teleprompter – lose that thing Dude and start speaking from your real heart and not the scripted one.  As for Hillary, she was, in Randy Jackson’s lingo, “just all right dog.  Nothing special.”   And you don’t think this matters?  Guess again.  If McCain gets charisma, the Dems are up the creek without a war hero.
3. It’s tax week, and America’s pain is going to be considerably amplified as people try to pay the IRS out of dwindling bank accounts.  Look for that to show up in the May economic data as yet another bearish force.

This article appeared in the Providence Journal Tuesday, April 8, 2008

Tuesday, April 8, 2008

IRVINE, Calif.

I WAS BARACK OBAMA before Barack Obama — sort of. My strong advice is that he should graciously embrace a “unity ticket” with Hillary Clinton at the top and himself as the vice-presidential candidate. The likely alternative is a McCain victory — and the ritualistic Republican gutting of a once promising politician.

My own “Obama experience” occurred in 1992, when, as a whiz kid, I ran for mayor of what was, then anyway, the sixth largest city in America — San Diego. Like Obama, I was a gifted orator who could stir a crowd. Like Obama, I had a Harvard pedigree and was full of new ideas. Like Obama, I also had a horde of grassroots supporters who could swarm precincts all over the city.

However, like Obama, I had never run much of anything, especially a major city. Like Obama, I was more prone to mistakes than most seasoned politicians. Like Obama, some of my positions were simply too liberal for the mainstream. Nor had I been fully “vetted” politically, which is to say there were yet some skeletons in my closet.

My own election result was what the writer John Barth might have described as a “paradigm of assumed inevitability.” As the white knight running against a gaggle of shopworn politicians, I decisively won the primary election and emerged as toast of the town. However, by general election day in November, I was toast.

What did me in is precisely what will do Obama in: Youth and inexperience flying headlong into the Republican meat grinder and spin machine. As a result of the mountain of mud thrown at me, almost half the city hated me by November while even some of my own staunchest supporters were disillusioned. I not only lost the race (albeit by a few percentage points). My once promising political career was effectively over — all because I reached too high too soon.

These same perils await young Barack and are precisely why a “unity ticket” offers the best long-term path for his political career. As the VP candidate, much of what the Republicans can throw at him, particularly on the experience issue, simply goes away, while his running mate Clinton has taken every possible hit they’ve ever thrown at her and remains standing tall.

Equally important for the strategic calculus, [FOR FULL ARTICLE CLICK HERE OR CUT AND PASTE http://www.projo.com/opinion/contributors/content/CT_navarro8_04-08-08_GE9BDVR_v22.39d82fc.html

The Well-Timed Strategy

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

Read it and Reap!

60 Minutes Alert: Please tune it to 60 Minutes this Sunday for a very interesting segment on sovereign wealth funds.  If you miss the April 6^th show, you can catch it on the web by clicking here.

This Week:  Don’t Fight the Tape

The tape is telling us that the major U.S. market indices are now in a clear technical rally.  It is not exactly clear as to why this is happening, but both the DOW and QQQQ are technical-indicator longs while SPY is moving close to the long side.  (A technical bounce for the dollar is perhaps helping.)

This is the kind of technical rally you should feel free to trade IF your horizon is relatively short.  However, the emerging fundamental situation seems just too bearish for there to be a sustained upward trend.  Consider that:

1. The U.S. economy continues to slow and the situation of consumers continues to deteriorate
2. The Japanese economy has begun yet another retreat
3. Inflation is a significant problem in the eurozone that is constraining the ECB from cutting interest rates as economic woes mount.
4. Global cost-push inflation in the form of fuel and food price shocks continue to take their toll both economically and in terms of increased political instability.
5. Everywhere I go, Main Street cabbies, restauranteurs, merchants, et.al. are all telling me about how slow things are.  Doesn’t matter whether I’m in Newark or Halifax or Chicago or Vancouver or the OC.

On top of this, the presidential race is motivating politicians to embark on large scale bailouts that are going to create a fiscal drag on the U.S. economy, likely for years to come.

QUICK TAKES

1. My ruminations on Clinton-Obama have dramatically increased my hate mail.   To further fan the flames, check out my oped scheduled to run at www.projo.com on Tuesday, April 8.
2. Please send me your ideas on how to play the higher food prices in the market.   Any good restaurant stocks ripe for a short?
3. The latest Congressional bill for a real estate bailout includes billions for the developers in tax breaks for losses taken.  This is the height of both stupidity and corruption in Congress.  No wonder we can’t balance a budget.