Blunder-Bust

• September 23, 2002
• Peter Navarro

Market
Trend:

Down

Market
Outlook:

Neutral

Sectors
Long:

Ca$h

Sectors
Short:

Ca$$h

David’s
Picks: Ca$$$h

Peter’s
Picks:

QQQ Fed Macroplay

Dominant
Position: CA$$$$$$$$H

The Broad Market Outlook: A Colossal Muddle

Fed
Chairman Alan Greenspan could ride, albeit briefly, to the economic rescue this
week with a surprise rate cut. That
would be a nice surprise and give the markets a much-needed lift. Still, rate cut or not, we
continue to suffer from much longer-term
macroeconomic problems — oil price shocks, a weak dollar, a jobless recovery,
a profitless recovery, etc. (If you
have been reading this column regularly, you know this list of laments.)

Accordingly,
this week, since we continue to remain in “market neutral,” this seems to be
a good time to assess not just where we are economically, but how we got here. To this end, we offer up the following rather sharp-edged critique of our
fearless economic leaders — excerpted from a freshly written article.

Muddling Through

mso-bidi-font-style:italic”>
“We have involved ourselves in a
colossal muddle, having blundered in the control of a delicate machine.” John Maynard Keynes’ prophetic warning on the eve of the Great
Depression rings uncomfortably true today as repeated blunders by America’s
putative “leaders” continue to pummel the stock market and economy.

#1: Fed Chairman Alan Greenspan Today, with an economy so obviously heading
toward a double-dip
recession, Chairman “Nero” continues to fiddle on further interest rate cuts,
while the economy can’t even muster a slow burn.

mso-bidi-font-style:italic”>#2: President George
Bush — His ill-advised tax
cut gave us the worst of both worlds — no real effective fiscal stimulus in
the short run and a significant contribution to inflationary budget deficits in
the longer run.

His “shoot from the
lip” Iraqi policy has resulted in a verbal international crossfire at
America’s First Cowboy and unpardonable delays in a quite necessary invasion.

The result: Since last January, the global economy has been slapped with
a $6 per barrel “war premium” on the price of oil.mso-bidi-font-style:italic”>#3: Treasury
Secretary Paul O’Neill — This
BlunderMeister kicked the whole weak-dollar craze off by announcing a weak
dollar might be in America’s interest. True,
we have a chronic trade deficit and a cheaper dollar would boost US exports
and depress foreign imports. But
O’Neill’s intemperate remarks couldn’t have come at a worse time for the
US stock market, which falls on weak dollar sentiment as foreigners pull out
their assets to avoid “currency risk.” Nor has it helped the recession-wracked European and Japanese economies
that desperately need strong exports to the US.

#4: Bush Economic Advisor Lawrence Lindsay —
He apparently suffers from the same “foot-in-mouth” disease as his
boss. Witness his most recent
front-page faux pas g These intemperate words — based on a back-of-the-envelope calculation
rather than hard analysis — further stoked inflationary and deficit fears and
roiled the world financial markets.

mso-bidi-font-style:italic”>#5: A Guns AND Butter
Congress —
Just as
President Lyndon Johnson refused to sacrifice any “butter” for “guns”
during the Vietnam War, this merry band of free-spending incumbents refuses to
acknowledge a coming, very expensive, decade-long battle with terrorism. While Congress won’t read the fiscal restraint writing on the wall, a
bearish Wall Street certainly can. It
sees rising deficits, soaring interest rates, the crowding out of private sector
investment, a possible replay of the stagflation-wracked 1970s, and ultimately
lower earnings and stock prices.

#6: America’s Corporate Executive Swill —
As if wanton plundering by Enron’s Jeff Skilling, Adelphia’s Rigas
family, and Tyco’s Dennis Koslowski weren’t bad enough for investor
confidence. Now once well-respected
capitalist “gods” and “goddesses” like G.E.’s Jack Welch,
Citigroup’s Sanford Weil, and Martha Stewart have been found to have feet of
clay. Et tu,
Jack. Then fall the markets!

It
won’t be easy to turn America’s sinking stock market and economy around, but
here’s a good start.

• mso-bidi-font-style:italic”>Mr.
  Greenspan: Xut rates at least once more and loosen up liquidity.
  

• mso-bidi-font-style:italic”>Mr. Bush: “Walk softly and carry Teddy Roosevelt’s big stick” as
  you both put AND shut up.
  

• mso-bidi-font-style:italic”>Congress:
  Come quickly to grips with the grim fiscal reality of a costly war on terrorism.
  

• mso-bidi-font-style:italic”>America’s private sector: Clean up your act or go directly to jail
  without passing “go” and collecting your lucrative stock options and penthouse
  perquisites.
  
  

The Week’s Macro Data Market Movers: A Fed
Surprise??

The
biggest event of the early part of the week will be the meeting of the Fed’s
Open Market Committee. The Fed
Funds futures are putting only a 20% probability on another rate decrease and
that conventional wisdom has been embraced by the financial press.

Accordingly,
we think that this would be a PERFECT opportunity for the Fed to
UNEXPECTEDLY
lower rates once more. Greenspan
LOVES to catch the markets by surprise and, in truth, the economy is now
weakening to the point where one more dose of monetary stimulus may well be
warranted. (If he doesn’t pull the
trigger, it won’t be because he thinks the economy is doing OK. Rather, it will be because he fears that fiscal policy is now
structurally overstimulative and will eventually damn us with inflation.)

As for
the Consumer Confidence and Consumer Sentiment numbers that are flying on
Tuesday and Friday, look for the markets to react more to Friday’s Sentiment. It’s a two-week number rather than the
four-week Consumer Confidence and
therefore a bit fresher — taking in the unsettling events of the last two
weeks.

Look
also for the homebuilder-credit matrix to suffer a “shiver me timbers” jolt
if either or both existing and new home sales show any softness, whereas an
upside surprise would have much less juice. (We continue to believe this is a short waiting to happen.)

Finally,
the Q3 GDP numbers will certainly be interesting. Again, the market risk is more to the downside — if it turns out we are
growing more slower than previously believed.

The
Macroeconomic Calendar

*
Potential major market movers in red

Macroplay of the Week: Long QQQ In Advance of
Fed Announcement

As
we indicated above, we believe that the odds the Fed will lower interest rates
are at least somewhat higher than the Fed Funds futures and conventional wisdom
are signaling. Accordingly,
there is an interesting day or swing trade with seemingly little downside risk
to be had:

Go
long
(
QQQ |
Quote |
Chart |
News |
PowerRating) a few minutes before the Fed is supposed to announce its new interest
rate policy. Immediately
close the position if the Fed announces the policy is unchanged. Otherwise, if it lowers rates, look for a sharp bounce up. Then either take your profits
OR hang on with a tight stop for what
might be a few days of rally.

What
makes this interesting is that there should be little downside risk. If the Fed does nothing, as expected, the markets should already have
priced in that expectation. If the
Fed unexpectedly lowers rates, we should get a nice pop.

Note:
If QQQ rallies strongly on Monday and Tuesday before the meeting, it weakens the
rationale for the strategy as the Cubes may be a little rich.

If you
have a favorite macroplay or stock you would like us to consider in this column,
send an e-mail to peter@peternavarro.com
or go directly to https://www.peternavarro.com.
We’d love to hear from you.