The Well-Timed Strategy

                                                  

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

 

 Market PulseThe stock market remains in a funk, and the deity help us if the Dow's support level of 8000 is breached. Any failure to hold the current market bottom could result in a sharp lurch downwards. The technical precariousness of the market is reflected in the continued deterioration fundamentally in the global economy. In Europe, casualties continue to mount -- Ireland and Spain are poster children for the basketcase economy. In Asia, while China downshifts and Singapore circles counterclockwise around the drain, South Korea and Japan face daunting challenges. Meanwhile, on home soil, the juxtaposition of the adoring masses in Washington welcoming our new president and the worried faces on Wall Street underscored the point that we are putting too much hope on one single man to pull us out of the morass. This crisis is far deeper than anything we've ever experienced in our lifetime. That said, it would be refreshing to have a Treasury Department that is run efficiently rather than like the Keystone cops. It would be unprecedented if we were able to pass a fiscal stimulus that was actually able to target high return investments rather than devolve into a super pork fund. From a trader's perspective, this is hardly the time to start going long this market. Risk remains to the downside until we get far more clarity on the various fiscal stimuli being put into place around the world and until we see whether all this sorrow and woe will spark a trade war. Last take: it was encouraging that our new Treasury Secretary has China's currency manipulation currently in his scope. It was highly amusing to note the response from the Chinese to Tim Geitner’s call for an end to Chinese currency manipulation. China's top officials claimed, of course, that they had never manipulated their currency to boost exports. What was amusing about that story in the Financial Times is that on the very same page, the Japanese finance Minister was quite upfront about the need to manipulate the yen downward to bolster Japan's exports. Who do the Chinese think they're kidding? And by the way, the other line of attack by the Chinese, which is typical China strategy, was to attack the character of our new Treasury Secretary, calling him immature. Beijing can whine all it wants, but  currency manipulation is harmful to both countries. Reform has to be high on the agenda of the Obama administration. 

The Well-Timed Strategy

                                                  

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

 

This Week: Let the Sideways Begin

 Market Pulse Last week, I noted that a technical market rally was likely inconsistent with the underlying economic fundamentals, which continue to show deterioration across countries and continents. With the market's 4% drop last week, a likely sideways pattern is coming more into focus as Mr. Market debates whether all the fiscal and monetary stimuli coming down the pike will be able to first stem the recessionary bleeding and then jumpstart the US and global economies. What I find so interesting about the market action over the last several months is a clear tendency for market participants to remember the up days better than the down days. If you look carefully at a chart of this market, however, it is looking more and more like a sideways pattern than any nascent upward trend. Parsing the fundamental data, it seems to be more difficult to paint a bullish scenario than a bearish one. But a collapsing global economy is likely to be tougher than any gaggle of central banks or big spending Keynesian politicians. This is much more a time to watch and wait (yet again) while the market sorts out the news.Short Takes

1. I have waxed semi-eloquent in his column for several years now about the failure of California's Republican government to impose even the slightest bit of fiscal restraint. Now, my family and I are about to pay for the governor's sins with a likely across-the-board 10% pay cut at the University of California. Thanks for that stinking cigar.  But don't feel pity for me -- the bigger point I have been pounding on is that pay cuts like these represent the antithesis of a fiscal stimulus and will only help plunge the California economy deeper into the dumper.
2. Barron's magazine did a feature article on the "blossoming of nuclear power", but I think the author got the story wrong, at least from a trader's point of view. Yes, a handful of big utilities are getting ready to build nukes. Historically, however, it's not utilities that make out like bandits on nuclear power. It's the vendors who sell the technology. The reason is that the utilities operate in a regulated environment in which is very hard to get a fair return on big capital projects. We got precious little analysis from the author on vendor plays -- a great pity.
3. The “Noriel Rubini” of South Korea got busted by South Korean storm troopers for spreading truth along the Internet. This blogger named "Minerva" -- an unemployed university graduate student -- proved to be smarter than any 10 finance ministers in South Korea. With uncanny accuracy, Minerva predicted the crash of the South Korean won -- and now is wound up in the slammer.  So much for free speech and a democratic South Korea.
4. And one more note about Barron’s Magazine: I can read columnists like Michael Santoli all day long and learn something. What annoys me -- and I've said this in other columns -- is why Barron's top brass insists on sticking with its usual suspects every time it does one of its investment roundtables. If I never had to listen to what people like Abby Joseph Cohen thought about the market ever again, it would be too soon. Based on her track record in Barron's, she ought to be bronzed as a contrarian indicator. Just one man's opinion.

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Commentator Biography:

Market Pulse All major US stock market indices -- the Dow, the NASDAQ, and the S&P 500 -- are now clearly in the early stages of a technical bull market rally. It remains to be seen whether the underlying economic fundamentals will justify this technical rally. Either the markets are signaling that the recession will soon be over -- or market participants are about to be sucked into a vicious bear trap. The bullish case may be argued on the basis of the credit market finally coming back into equilibrium, unprecedentedly low interest rates by the Federal Reserve, the stimulative effects of much lower oil prices, and a massive fiscal stimulus coming as soon as Barack Obama takes office. These stimuli notwithstanding, the data strongly suggests that the recession continues to deepen in the US, Europe, and much of Asia as virtually every industrial sector slows sharply. In fact, over the last month, the US manufacturing sector has contracted at its fastest pace in almost 30 years. Meanwhile, as an Asian canary in the coal mine, the once mighty dragon Singapore is experiencing its worst recession in almost 50 years. While the first day of the new 2009 year gave us a 3% jump in the Dow, that's also what happened in 1931. In that year, as the Great Depression ground America's soul to dust, the Dow wound up losing over 50%.

The bottom line: if you want to trade this market, be ready to cut and run at a moment's notice if bearish fundamentals overcome bullish technicals.

 

Last take: I took a look at the book "When Markets Collide" by Mohammed El-Arian, most recently of PIMCO and formerly Harvard's portfolio manager. This is yet another example of why the traditional paradigm of a buy-and-hold long-term strategy is bankrupt. Even with the much more sophisticated portfolio suggested by El-Arian to take into account global events, his portfolio would have been creamed in 2008.

The new paradigm pimped in this newsletter is to learn to stay cash or go short the market whenever the market trend turns down. In order to execute this strategy, you have to be mindful of the kind of economic considerations we regularly discuss in this newsletter.

Four good reasons to keep reading this newsletter:

1. The newsletter called the market top in October of 2007 within a several week interval of accuracy

 

2. The newsletter was accurate in calling the top of the commodity bubble in the summer of 2008.

 

3. In October of 2008, the newsletter noted that "it is time to begin to consider selectively going along this market." This is about when the market found its most recent bottom.

 4. In speculating whether a bottom had come in fact, been put in, I noted: “There is… a pretty good level of support that has been established now for the Dow at 8000.” Please forward this newsletter to a friend!