The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

 

Read it and Reap!

 

This Week: Bernanke in a Coupled Box

 

The Markets

 

Followers of this column will note two common themes I’ve developed since my call to cash last November.

 

• Theme One: At some point, U.S. Fed policy will be rendered neutral by emergence of inflation.

 

• Theme Two: The market trend will depend on which scenario of these three scenarios finally declare themselves  – the U.S. as global locomotive, a global economy decoupled from the U.S., or global stagflation.

 

Regarding Theme One, we have officially reached the point where the Federal Reserve is boxed in.  It can’t cut interest rates any more for fear that the cuts would further weaken the dollar and drive up oil and commodity prices along with interest rates and inflation.   Nor does the Fed dare raise interest rates for fear of driving  a stagnate U.S. economy below the zero growth line.

 

Regarding Theme Two, the decoupling scenario, which is the only bullish scenario of the three, is becoming less and less likely.   The underlying problem is that the U.S. has exported too much inflation to the world via the mechanism of a “weak dollar-rising oil prices” dynamic.    Asia is on fire, European inflationary is above target, and much of the globe is now leaning towards interest rate hikes that will inevitably cause the global economy to begin grinding its gears.

 

With Fed policy neutralized and the rest of the world in an inflationary, interest rate hike scenario, it is almost impossible for market trends to point up virtually anywhere.

 

In such a time, the best thing patient investors can do is to begin building a “buy list” for when the market, and particular sectors, hit bottom.  At some point, financials are going to look particularly attractive.   

 

If you must trade, then trade sectors which are relatively insensitive to the business cycle.  For example, most of the stocks I am now holding are biotechs driven by drug trials rather than the macroeconomy.

 

In the mean time, my call to cash in May remains in effect.   (On May 23^rd, I issued a “sell signal” and urged moving into cash.  Since that time the U.S. market has fallen by close to 10.)

 

Presidential Politics

In a grab bag of rulings, the Supreme Court reminded us why voting for President has a lot more to do with than just picking who sits in the Oval Office.    In fact, this week the Men in Black gave considerable succor to the right side of the political spectrum in their opposition to gun control and campaign finance laws and by limiting punitive damages in the Exxon Valdez case.  (Bizarrely, this conservative court also opposed the death penalty for child rape while boosting the rights of the Gitmo detainees.  Who says you have to be consistent.)

Whether you are on the right or the left, one thing should be clear: As November approaches, the Supreme Court will be used to energize the bases of both candidates.

Quick Takes

 

1. Jim Rogers has issued a call to buy the Chinese market and says he’ll be investing in China for the rest of the century.  I love Jim, but I’d take the other side of that trade.
2. Incredibly, German Chancellor Angela Merkel has announced that it will be impossible for her government to resist approving fuel subsidies for consumers.  If the world responds to higher oil prices in this fashion, we are all doomed.  That German would cave in is particularly scary.

 

 

THE CHINA EFFECT

Please see my latest You Tube report. 

 

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The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

 

Read it and Reap!

 

This Week: Barron’s Goes Bullish

 

The Markets

 

“Remain on the sidelines was last week’s refrain,” and it continues going forward as world events struggle for the hearts and minds and dinero of the markets.  Surprisingly, the perennially bearish Barron’s seemed to push hard in several article for a bullish scenario in its recent issue:  The argument: a slowing U.S. economy eliminates the need for interest rate hikes by the Fed while a slowing global economy bursts the oil market’s bubble and brings a barrel back down to a c-note.

 

I do think the bullish case rests on a rather parochial, U.S.-centric view of the financial markets while the more likely bearish case is best argued from a global perspective.  In the bearish scenario, the U.S. economy does indeed stagnate as the IMF is now forecasting.  In addition, inflation throughout Asia, Europe, and Latin America leads to interest rate hikes and a clear contractionary shock.   Toss in a few food riots and inflation strikes here and then and you’ve got all the ingredients for a nasty little dollop of chaos.

 

The bigger question we will be grappling with for a very long time is whether the food and fuel markets are in a long term upward secular trend, the coming likely cyclical dips notwithstanding.  Methinks this is likely the case.  The question is whether political systems around the world will respond positively to this challenge with sounder energy policies and a renewed commitment to agricultural reforms and innovations.  Alternatively, will the global polity regress into a world of food and fuel subsidies and export restrictions?  Stay tuned….

 

 

Presidential Politics

1. Nice piece in the weekend WSJ on a possible Jim Webb VP run with Obama.   The gist is that he would be a compelling candidate on the Iraq issue but given his background, a bit of role of the unvetted dice.  Are you feeling lucky Barack?
2. Check out this article at Canada.com on the “Dream ticket” and some new polling numbers.  Here’s an excerpt:

 

“…three in 10 Americans would be more likely to vote for Obama if he named the former first lady his vice-presidential running mate.   The Ipsos survey, released exclusively to Canwest News Service and Global Television, found the benefits of adding Clinton to the ticket far outweighed the negatives for Obama. The poll showed only 20 per cent of voters would be less likely to vote for Obama if Clinton was his running mate.

In particular, 43 per cent of Democrats said they would be more likely to support Obama if he choose his vanquished rival. Just 12 per cent of Republicans said they would consider Obama more favourable if Clinton was on the Democratic ticket, a potential downside in the Illinois senator's efforts to win support among moderate conservatives.   "At this point, picking Hillary looks like a positive move," said Mark Gross, associate vice-president at Ipsos Public Affairs.

Quick Takes

 

1. It seems that even Chinese Olympiads are being held hostage by the Beijing government.  So says an article in the NYT about Olympic gold medal winner Yang Wenjun. 
2. Kind of funny when Brazil’s central bank calls for higher interest rates to attack inflation in other countries given Brazil’s inflation history.  But that’s how far we fallen when Brazil is more responsible than the U.S. in its monetary policy.

 

 

THE CHINA EFFECT

Please see my latest You Tube report. 

 

Please forward this newsletter to a friend!

 

THE CHINA EFFECT

Please see my latest You Tube report. 

 

Please forward this newsletter to a friend!

 

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

 

Read it and Reap!

 

This Week: A Non-Shorting Short Story

 

[Click here to see my analysis in the Asia Times of the trading opportunities offered by the recent Chinese telecom restructuring.]     http://www.atimes.com/atimes/China_Business/JF07Cb01.html

 

The Markets

 

Half the time, it feels like the post-tech bubble period and half the time, it seems like the 1970s (without the disco).   

 

 The post-tech bubble déjà vu is a downward trending market with pockets of false hope – like the end of last week -- that a lot of people repeatedly mistook for a market bottom.   

 

The 1970s déjà vu is the increasingly obvious stagflationary pressures wracking the planet.  Asia is on inflationary fire, with Vietnam at around 25% and China putting out fake stats that dramatically understate the underlying inflation.   Europe is getting ready to raise interest rates while countries like Hungary outside the eurozone are stuck in a wage-price spiral.

 

It’s really hard to conjure up a bull market move out of any of this, particularly as we move into the dog days of summer.   Yet I don’t have the conviction to short.  Ergo, this is a good time to remain on the sidelines.  Except, of course, if you want to play some stocks outside the business cycle, (e.g., the options position I’ve got on VRTX which is developing nicely.)

 

 

Presidential Politics

The big debate now is over how much of the Clinton vote is going to defect to McCain while attention turns to the VEEP choices.  The two issues are not unrelated.

 

Quick Takes

 

1. I found a nice new toy to play with on my public speaking gigs.  I used an “audience response system” recently and am totally sold on using these things.  They really seem to engage the audience.  If any readers have any experience with these systems, ping me and let me know what you think.

 

THE CHINA EFFECT

Please see my latest You Tube report. 

The Well-Timed Strategy

                                                  

Economic & Stock Market Analysis for the Discerning Investor & Executive

www.peternavarro.com

 

Read it and Reap!

 

This Week: Ben Backed Into Stagflationary Corner

 

[Click here to see my analysis in the Asia Times of the trading opportunities offered by the recent Chinese telecom restructuring.]     http://www.atimes.com/atimes/China_Business/JF07Cb01.html

 

The Markets

 

Last week’s roller coaster cum bloodbath on Wall Street gives us a beautiful case study in the art of macrotrading and the importance of economic factors shaping market trends.    The case study started last Wednesday with Fed Chairman Ben Bernanke’s professint not only rising concern with inflation but also a desire to shore up the dollar.  Of course, it has been Bernanke debasing ye olde greenback through his over-aggressive rate cutting.  With Bernanke now drawing a line in the shifting sands of fortunes of the dollar – a marked policy shift for the Fed -- the markets reacted just like the macrotrading text book indicates:

 

In particular, the dollar strengthened on the prospects of higher U.S. interest rates.  This, in turn, sent oil and commodities prices, which are priced in dollars, down the chute.  The U.S. stock market then rallied on the prospect that the oil bubble might be now burst, and the contractionary effects of high oil prices would be moderated.

 

Ah, but what a difference a day or two – and one horrific economic report – make.  On Thursday, the ECB President warned of a possible rate hike.  This gave a boost to the euro at the dollar’s expense.  Then, on Friday, the jobs report came in with recession written all over it – with the unemployment rate jumping to 5.5% from 5%.  With this single report slaying expectations of a Fed rate hike coming soon to fight inflation, the dollar fall was accentuated.   Oil prices, in turn, spiked not only on the weak dollar news but also some saber-rattling by Israel over Iran’s nuclear program.  The end result was a Friday bearish trifecta of 3% drops for the Dow, S&P, and Nazz.

 

So here’s where we stand.   In the ongoing battle between our three possible economic scenarios – U.S. recession drags world down, global decoupling, and stagflation -- the clear winner last week for the second week in a row was stagflation.   As I have previously lamented, this is the worst possible scenario for bulls because it is impossible to cure with discretionary policy fixes.  Rate cuts exacerbate inflation and rate hikes exacerbate recession.

 

In fact, it is becoming increasingly obvious that Bernanke is being backed into a stagflationary corner.  Last week’s desperate save the greenback gambit perfectly illustrates this point.  No doubt, Greenspan’s favorite fall guy, AKA Helicopter Ben, was likely quite positive that his support for the dollar would make all things rights.  Pity the fool – except when we are his victims.

 

As for next week, if you are really superstitious, then you don’t want to be long on Friday the 13^th ahead of the CPI report.  It is the most likely market mover next week in terms of economic reports and the risks to the downside outweigh those to the upside.

 

My market trend bottom line is this : My “sell in May and go away” warning in this newsletter on May 23^rd remains in effect.  This is not a market I want to be long

 

 

Presidential Politics

 

So now the focus shifts to the Veep choices.   Interestingly, John Edwards has pulled his straw out of the eventual draw.  While he has his reasons, you may find this analysis from the New York Times of interest:

 

“There are other reasons to doubt an Obama-Edwards ticket:   David Axelrod, Mr. Obama’s chief strategist, worked for Mr. Edwards in the 2004 cycle, a relationship that did not end amicably. (In an interview with The New York Times Magazine last year, Mr. Axelrod explained the campaign’s failure by pointing to Mr. Edwards: “I have a whole lot of respect for John, but at some point the candidate has to close the deal and — I can’t tell you why — that never happened with John.”)

During the 2004 general-election campaign, Mr. Edwards was not seen as a team player on the ticket with Senator John Kerry. They couldn’t even agree on a campaign slogan: Mr. Kerry tried to rouse audiences with the chant, “Help is on the way.” Mr. Edwards stuck to his own version, “Hope is on the way.”    While Mr. Kerry in 2004 had hoped that Mr. Edwards, a Southerner, would help with rural voters, there was little evidence that Mr. Edwards’s presence on the ticket made any difference at all. (He didn’t even win his hometown in North Carolina.)

In the 2008 campaign, Mr. Edwards performed very well with male voters; but Mr. Obama needs more help attracting female voters.”

 

Quick Takes

 

1. At my most recent faculty meeting at the University of California, we were informed of a hiring freeze, a likely construction freeze on our new building, and the guaranteed lack of any COLA adjustment on salaries next year.  How’s that for a canary in the coal mine for California’s growing budget crisis triggered by the recession and housing sector collapse.  Note to the Governator: Republicans that act like big spenders in good times and then call for tax hikes in bad times need to find a new party.

 

THE CHINA EFFECT

Please see my latest You Tube report on the Sichuan quake.  The backpack picture is beyond words.

 

Reader’s Write

Mike S. writes on the recent revelation that China has sold counterfeit Cisco routers to the U.S. military:

 

“No one knows what other capabilities have been engineered into the counterfeit equipment. In addition  to the devices emulating the functions of a normal Cisco router or switch, it would be relatively easy to have additional circuitry onboard to copy and transmit the entire bitstream running through the device to an external destination known only to the counterfeiters or to those who designed the rogue circuitry.  Since the gear has been procured by the Navy and other national defense entities, you can see that there is the potential for a monumental security breach.”

 

 

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By Peter Navarro

One of the tragic ironies of the recent earthquake in China is that it has created numerous new, extremely dangerous dams in a country that already is the most dam populated country on earth. At more than 85,000 dams and counting, Chinese leaders already boast of having the tallest dams, the largest by reservoir capacity, the dam with the highest ship lift, and the most powerful electricity producer. From arch dams, earthen dams, and gravity dams to cascade and concrete-faced rockfill dams, China has it all.

Now, in the wake of the May 12 Sichuan quake, China has more dams than it may be able to handle. The new dams in question are the so-called “quake lakes”—34 at last count, of which 28 threaten to burst (China Daily, June 1). These quake lakes have been created by massive landslides into China’s river system. The landslides are serving as perverse “natural” dams; behind these quake lakes, water is rapidly building up.

Click Through to China Brief for full article or paste   http://www.jamestown.org/china_brief/article.php?articleid=2374217