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.

Click here to review my videos on TheStreet.com.  

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 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.

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 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.