Bursting Bond Bubble

• October 21, 2002
• Peter Navarro

Long Term Market Trend:
Down

Short Term Market Trend: Up

This Week’s Market Outlook: Bullishly Neutral

Macroplay of the Week:
(
PRSF |
Quote |
Chart |
News |
PowerRating),
(
TMWD |
Quote |
Chart |
News |
PowerRating),
(
BNBN |
Quote |
Chart |
News |
PowerRating),
(
INKT |
Quote |
Chart |
News |
PowerRating)

The Broad Market Outlook: Make that a Pivotal TWO Weeks

 “Interest
rates won’t stay this low forever.”
—

Yahoo!
Mortgage Center

The recent and broad rally not withstanding, it
may still be a bit too soon for most position traders and longer-term investors
to take the bullish plunge. Hear us out as we first lay out a number of
disparate dots and then go about the business of connecting them.

Dot #1: The Bond Market’s Bubble-Bursting Rally
Monkey

The amount of money invested in the bond market
is like an ocean compared to the stock market’s much smaller lake. If there was
any one thing driving the upward momentum in stocks, it was a perceived
“topping” of the bond market and a knee-jerk rotation from bonds into the ironic
“safety” of the stock market. No less than the King of Bonds, Pimco’s Bill Gros,
declared such a top, and last Wednesday’s action’s marked on transition. On
Wednesday, while stocks fell, SO DID THE BOND
MARKET. It was the first time the two had moved in
concert in a long time. In honor of our
beloved Anaheim Angels, we therefore dub the bond market the
real
Rally Monkey, as it provided the fuel for the
stock market’s comeback.

Dot #2: The Good Earnings Statements Were
Actually Bad

True, over half of the S&P companies beat their
earnings estimates — normally a very bullish sign.  Equally true, almost to a
company, the gains in earnings came NOT from robust demand and increasing
revenues BUT rather from cost-cutting.  This is a sobering portent of a weak
consumer. It is also a signal of both a continued jobless and profitless
recovery. (As one of the readers of this column succinctly put it, cost-cutting
is a one-time event, not a process.)

Dot #3: The Bad Earnings Statements Were Really
Bad

From Siebel and Ericsson to Ebay, Merck and
Scientific-Atlanta, there were plenty of  disappointments on the earnings front.
These were glossed over by the Rally Monkey.

Dot #4: The IBM and Microsoft Bumps

The market rallied on days when it was greeted
with good news from Big Blue and Big Boo. We do not subscribe to the idea that
either of these companies are “bellwethers” for the broader economy.  Instead,
we see zero sum games. 

(
IBM |
Quote |
Chart |
News |
PowerRating) is quite fairly simply kicking the butt of
its competition as it reaches its tentacles into new areas. Microsoft
(
MSFT |
Quote |
Chart |
News |
PowerRating) is using
the full array of its monopolistic dirty tricks to intimidate, torture, and
eliminate its competition — to the detriment of high quality innovation in
virtually every area it dips its toe in.

Dot #5: Both the Supply and Demand Data Suck

Many of the macroeconomic indicators are
flashing weak signals — from flagging consumer confidence to the latest
disappointing industrial production and factory utilization reports. In the
best-case scenario, we get only modest growth. In the worst-case scenario, we
still can not rule out the double dip. In this regard, this chart from

https://www.economy.com  which tracks the probability that the US
economy will fall in to recession may be of interest.

 

Dot #6: The Housing Sector Kicked Butt

It’s an open question as to whether the housing
sector is a rocket ship with plenty of fuel left or an illusion levitating on
borrowed time. It cannot augur well that the bond-market bubble has begun to
burst.  A rise at the long end of the yield curve would bring the housing boom
to a quick halting jog from its current sprint.

Connecting all this dots, the best we can say is that full retreat in the
bond market may be ALL the stock market needs for a sustained rally of some
weeks or months. Yet, the macro fundamentals remain very suspect while at
the company level, this economy and its workers cannot live on the “bread” of
cost-cutting alone.  Accordingly, we are more than willing, as we were during
the brief July-August rally, to jump on the train in the direction it may be
headed — long for a bit. But we sure as heck will remain very cautious —
particularly since the technical side of the equation indicates stiff resistance
ahead on both the Nasdaq
(
$COMPQ |
Quote |
Chart |
News |
PowerRating) and
S&P
(
$SPX.X |
Quote |
Chart |
News |
PowerRating).

The Week’s Macro Data Market Movers: Will the Beige Book See Red?

The Macroeconomic Calendar

* Potential major market movers in red

As with last week, the market is mostly more or
less on its “corporate earnings reports” own. Still, there are some reports
that, coupled with the earnings news, are likely to make this week part of the
“pivot” that the market is trying to make.

The Index of Leading Indictors will be bleak but the market has already
discounted the news because this is actually a lagging indicator. But on
Tuesday, check out https://www.economy.com’s “risk of recession” update to see any evidence
of the double dip.

The first big news of the week hits on Wednesday when the Fed releases its
comprehensive look at the economy via its Beige Book. Don’t be surprised at
all if the news isn’t good and triggers a pullback from the rally and
possible retest of the lows.

Finally, analysts expect a fall off in durable goods on Friday. But so long as
the report doesn’t fall off a cliff, it shouldn’t be a market mover. Nor should
existing and new home sales — which should continue to be very robust — the
happy frenzy before the coming storm.

The Week’s Earnings Calendar Movers: More Bad Than Good?

The Earnings Calendar — Stocks of
Note

* Potential major market movers in red

Source: Yahoo
Finance

“US stocks are likely to rise
this week — if trends in earnings surprises for the current quarter and
guidance for the next period continue to hold.” —
Reuters

Well, maybe. But maybe
not. On the corporate-earnings front, our speculation is that, unlike last week,
there may be a bit more earnings disappointments to put downward pressure on the
market than good news to propel it. Plus, the market has probably already
priced in the trend in earnings from last week and extrapolated it to this
coming week, so the risk is asymmetrically to the down side.

Some of the stocks we will be watching carefully include:
Texas Instruments and Veritas
on Monday, Computer Associates and
KLA Tencor on Tuesday,
AOL and Freddie Mac
on Wednesday, Amazon and
Countrywide Credit on Thursday, and
Verizon on Friday.

Macroplay of the Week: Pennies from Heaven

Am I the
only one who can remember when Portal Software hit $14 a share, just before it
took off for the basement? I’ve been
watching this along with some of the more spectacular flops in the dot.com space
like Tumbleweed

(
TMWD |
Quote |
Chart |
News |
PowerRating),
Inktomi

(
INKT |
Quote |
Chart |
News |
PowerRating), and
Barnes and Noble.com

(
BNBN |
Quote |
Chart |
News |
PowerRating).  Consider a basket of these
now truly — under a buck — penny stocks on the assumption that we are at or
near a market bottom bottom and that each of them actually has a pretty good
product and business model. 

In such a consideration, you may also want to view
these penny picks more as call options in which you could hit big rather than
simply stocks — but also lose all your money. Still, you are only putting up a
few pennies in the hopes of striking big dollars. Here’s a chart showing the
performance of these penny pinchers relative to the Cubes.

 

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.