Buckle Up Those Seatbelts!

Market Outlook:
Cautiously bearish

Sectors Long:
Cash

Sectors Short:
Wireless

Macroplay of the Week:
Biotech HOLDRs

(
BBH |
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PowerRating),
Sangstat
(
SANG |
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PowerRating), Amgen
(
AMGN |
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News |
PowerRating)

It will likely be another very volatile week
on Wall Street, as a veritable torrent of new macro data is likely to beat down
or bolster the markets (see below). That said, the even more dominant damper on
investor sentiment right now appears to be the looming August 14
deadline thrown down by the SEC.

Under a new requirement, the CEOs of America’s biggest companies will have to
personally vouch for the accuracy of their financial statements. This new
regulation may well keep enough money on the sidelines to make a sustained rally
difficult over the next several weeks — and that doesn’t even take into
consideration the possibility that at least some major companies will admit to
cooking their books in the days approaching the deadline.

As for the bigger macro picture: On the consumer side, consumer confidence
continues to fall and thereby threaten the demand side of the GDP
equation. Moreover, the housing sector is softening so the torrent of new cash
that was filling the pockets of consumers from refinancing their mortgages is
likely to be reduced to a trickle. On the supply side, the big question
continues to be whether business executives will belly up to the capital
investment bar and pull their GDP weight — with the jury still out. Continued
slow growth is therefore a real possibility — and a double dip recession still
can’t be ruled out.

As for any good news, the dollar seems to be stabilizing temporarily — even as
foreign outflows from the market continue to have a depressive effect.

Now for the macrowave puzzle of the week: The conventional wisdom has us
reaching a bottom soon after which we shall then move smartly upward — “just
like before.” Let us raise another possibility, however, based on the struggles
this market is having in finding a bottom. Suppose the economy is now in a
period of a one-time adjustment to two very new and major macrowaves.

The first is the “terrorist tax” which augurs budget deficits and lower
productivity relative to the roaring 1990s.
The second macrowave is the larger band of uncertainty that investors are now
drawing around the stock market because of a lack of confidence in the truth of
accounting statements. Since increased uncertainty means higher risk and since
higher risk can only be justified by a higher return, stock prices must fall to
compensate for this risk.

Under this double macrowave scenario, we may not simply find a bottom in the
market where most technical analysts think it will be
based on historical patterns. Instead, we will find the bottom some
quantum drop below the expected bottom because of this structural
adjustment. This is a scenario, then, for a fall of the Nasdaq below 1000 and
maybe even as low as 700. The odds of this may be low — but you don’t want to
bet against but rather stay in cash.

The week ends with a bang that may leave many investors whimpering as the Jobs
Report comes out. The numbers will be watched closely for any signs of a double
dip recession — with the risk also on the downside with regard to market
reaction, i.e., the market will move much more on a negative surprise than a
positive one.

Bottom line: Buckle up your seatbelts because
the macro data is really going to lead to a very bumpy ride — and much of the
risk is to the downside.

That said, it is interesting to note the turnaround in biotech that is occurring
even as the traditional pharmaceutical sector has been withering on the market
vine. My speculation is that these two events are not unrelated. To the extent
that Big Pharma is suffering from patent expirations and empty drug pipeline
problems, it will be all the more important for Big Pharma to joint venture
with, or simply acquire, some of the Biotech Babes. That means more capital
into the sector, more activity, and a boost for biotech.

So here’s the macroplay proposition: Go long BBH and spice the basket up with a
couple of stocks that look pretty good from a technical perspective like
Sangstat
(
SANG |
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Chart |
News |
PowerRating) and maybe
Amgen
(
AMGN |
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News |
PowerRating).