Don’t Rule Out The Potential For Bad Things To Happen–Here’s Why

• May 2, 2005
• Peter Navarro

Navarro’s Broad Market Outlook: GDP Blues

The Fed and the GDP are now in
a duel to see who’ll stop firing at each other first.  If the Fed continues to
raise interest rates — with another 25 basis points due again this week — look
for the Greenspan Fed to lay its second consecutive economic recovery into the
recessionary ground.

The only hope for the markets
may be a new poll in Barron’s that shows the bulls finally getting
worried — after investors have been taken to the woodshed for the last three
months.  Gotta love those contrarian indicators.

Aloyan’s Technical Take: “Volatile(y) getting
nowhere!”

The markets
finished another volatile week mixed, with the Dow” and S&P 500 in the green,
and the Nasdaq in the red.  The Dow closed up 35 points (.34%) at 10193, the S&P
500 was up 5 points (.41%) at 1157, and the Nasdaq was down 11 points (.55%) at
1922. 

My sector breadth indicators were somewhat neutral, with, 58% of the sectors in
the red.  The Real Estate sector led the strength, while the Commodity-based
sectors: Metals & Mining and Energy, led the weakness.  The dollar was up for
the week (closing at 84.39), and is continuing to build a base, I still need to
see 2-3 closes over 85 before going long.  Bonds rallied (further flattening the
yield curve), with yields on the 10Yr Treasury Yield closing down at 4.20%. 

My trend indicators remain down for the S&P, “Dow”, and the Nasdaq — although
the “Dow” and S&P have been trying to build a short-term base over the last
two weeks.  My breadth, momentum, and volume indicators are now short-term
“neutral.”  My sentiment and economic/fundamental indicators continue to support
a defensive position.

Hedging Your Bets With Matt Davio: One
Picture is Worth…

Last Friday was Day 8 of the
pattern we have been locked into which gives us no two days in the same
direction neither up nor down. That’s right, the last eight days we had
up/down/up/down/up/down/up/down.  That’s really ugly.

In the current type of
downtrend, it’s very common for small investors to think that it’s “too late to
sell” and go to cash with the market already 6-8% below its recent highs.  They
don’t want to take any losses and believe the market will rebound.  Well guess
what: The market was already 14% below its highs before the crashes
of 1929 and 1987. 

The current set of market
characteristics — jointly unfavorable valuations and market action — has
historically been characterized by negative average returns, but also by
relatively high volatility, resulting in a very poor return/risk tradeoff.  This
type of market has occurred less than one-quarter of the time, but it has
contained nearly every major market plunge of note.  This includes 1929, much of
the 1973-74 decline, 1987, and of course the most brutal portions of the
2000-2002 bear market,

Thus, it would be a mistake
for investors to rule out the potential for bad things to happen here. As I
noted last week, if a loss of say, 30% on your unhedged stock investments (index
funds and the like) would cause unacceptable harm to your financial security,
you’re probably taking too much risk.

The following picture should give you an idea of what’s going on behind the
market volatility.  Things simply aren’t in an upswing now — as the talking
heads and bureaucrats would have us believe.

Never mind that the GDP is still is at a solid 3% growth clip, and the measures
of inflation such as gold and the strength and uptrend in some of the other
commodities have reversed — at least for the time being. A major problem is
that the high price of oil above $50 a barrel has proven to be more than a
short-lived spike to consumers.

Peter’s Portfolio: (Mostly) Cash

            Closed out my
Lennar short with a nice gain.   Closed out my Quicksilver short after a
Barron’s bounce threatened to put me in the red. 

            It boggles my mind
why thousands of investors would pour millions of dollars into ZQK just because
some journalist in Barron’s writes a silly little puff piece about the company. 
This is not to say that Barron’s doesn’t often do go company analyses.  But that
was pure fluff.  So I still think ZQK is a dog but I’m not going to run headlong
into the headline meat grinder.

            As to what I’m
buying, my old buddy CPTC.OB looks to have found its bottom again.  Will scale
back in a bit depending on the action, as I like this long term.

            My losing positing
in ZILA seems to be stabilizing.  Trying to resist the urge to double down on a
stock that has a great product and good long term prospects — but that the
market does not want to value the way I see it.  Waiting for earnings at ARDI as
well to confirm my holding this puppy — also slightly in the red.

David’s Pick: Cash.      

For investment management services, contact David at

platinum@peternavarro.com.   If you are interested in hedge fund services,
contact Matt at

infinium@peternavarro.com.

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.