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Sunday, March 29, 2009
Weekly Newsletter -- April 3, 2009
The
Well-Timed Strategy
Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!
Week Ending April 3, 2009
Volume14, Number 12
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.
11:56 am edt
Sunday, March 22, 2009
Weekly Newsletter -- March 27, 2009
The
Well-Timed Strategy
Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!
Week Ending March 27, 2009
Volume14, Number 11
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.
2:34 pm edt
Sunday, March 15, 2009
The
Well-Timed Strategy
Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!
Week Ending March 14, 2009
Volume14, Number 10
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.
11:01 am edt
Sunday, March 8, 2009
Weekly Newsletter -- Week ending March 14, 2009
The
Well-Timed Strategy
Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!
Week Ending March 14, 2009
Volume14, Number 9
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.
1:41 pm edt
Sunday, March 1, 2009
Weekly Newsletter -- Week Ending March 6 2009
The
Well-Timed Strategy
Economic & Stock Market Analysis for the Discerning Investor & Executivewww.peternavarro.com Read it and Reap!
Week Ending March 6, 2009
Volume14, Number 8
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.
11:01 am est
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DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any
of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors
express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.
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