Here’s One Stock I Won’t Be Buying

• January 24, 2005
• Peter Navarro

 

Navarro’s Broad Market Outlook: Back to Basics

Last
week, I indicated my belief that a short term rally might get underway.  I was
right — but only for one day.  After that, the markets turned over on a drumbeat
of bad news — oil prices up, consumer confidence down, earnings disappointments,
and so on.  On the basis of this continued snowballing effect, I cleared out
most of my positions and have gone to cash — waiting now until some of this
ugliness sorts out itself out. 

 

In the
meantime, let’s get back to some basics to try and understand why the Xmas rally
has failed to extend into the New Year.

 

The
stock market only goes up when investors believe that corporate earnings will be
strong and rising.  That requires a GDP growth rate in the neighborhood of 3.5%
or higher for 2005. However, the data indicates that all four components of GDP
are in trouble — consumption, investment, government spending, and net exports. 
Consumer confidence is now falling while consumers are being squeezed by higher
oil prices and flat wage growth.  Business investment is looking into the Fed’s
gun barrel of a likely seven more 25 basis point rate hikes over the next
year as the Fed seeks the “neutrality” of a 4% discount rate.  Government
spending is still profligate as Bush II does his level best to emulate LBJ’s
1960s stagflationary mistake of pursuing “guns and butter” while the
fiscal stimulus of tax cuts have run their dollar weakening course.  Moreover,
with the trade deficit hitting a mind-numbing $60 billion, that weak old
greenback is hardly offering us the export boost it was supposed to. 

 

Of
course, the stock market can read the slow to stagnate GDP growth handwriting on
the wall and is heading due South.  More pernicious, the long bond market
refuses to buy the Fed’s data-defying rhetoric of rising inflation and a robust
economy and is comfortably allowing the yield curve to flatten — almost always
an ominous sign of recession or stagnation.   

 

This
might all turn around with $39 a barrel oil, a robust rise in productivity with
collateral wage growth, strong evidence of increased corporate spending, a
healthy dollop of Rubinomics fiscal restraint on Capitol Hill, a revaluation of
the Chinese currency, a stronger Europe to buy some U.S. exports, and a
resultant sub-$50 billion a month trade deficit.  And maybe I might win the
lottery…..

^next^

Aloyan’s Technical Take: If you’ve tried to get long, you’re
wrong!

All
three major indices continue to dismay the unsavvy momentum traders who have
been buying in over the past few weeks, expecting an “oversold” rally.  However,
we are now nearing a complete erasure of all of the ’04 gains in just three
weeks!

  

Frankly, the technicals are terrible.   My trend indicators are “bearish.”  My
breadth and momentum indicators are “bearish.”  My volume indicators are
“bearish.”  And, my sentiment and economic/fundamental indicators continue to
support a cautious position.  In addition, sector breadth has turned extremely
negative, with 97% of the sectors in the red for the week.

 

Last take:  You have probably heard the
statistics that show as January goes, so goes the rest of the year.  Here’s
another dynamic that is more operative here:

Since
1952, seven out of the past 13 post presidential election years have produced an
average annual negative total return of -8.62% for the S&P 500.  Further, 87% of
the negative post-election years occurred when a Republican took office!  Couple
this with the fact that we are late into the 4-year cycle which began off the
October 2004 bottom, and there’s all the more reason to believe that 2005 will
be a rough year for U.S. equities.

Hedging Your Bets With Matt Davio: Chunks to Chew

Well,
the broader U.S. markets gave us the third down week in a row — with the Dow off
1.5%, SPX off 1.4%, and NDX off 4.0%.  Not the bearish whoosh I would have hoped
for to short, but a continued downswing none the less.

 

Dow
Theorists now have their downside confirmation back in play as the December 04
lows were taken out by Friday’s close of 10392.  However, there still doesn’t
seem to be an element of fear out there in the market place, and I still expect
to see 1117-1135 range in the broader SPX before we can call it a true wash
out.  That would be just shy of a 7-9% correction and bring us back to a
congestive area in the broader markets.

Again,
time will tell if we can get there sooner than later. We are still seeing many
technicals showing an oversold market — yet the percentage of bullish
participants stays strongly over 55%.  This is no signal of an ultimate bottom.

 

EBAY
was used as the poster child for the sell off.   I am not buying it as
the fundamentals just don’t support this stock or the market in general. 

Watch
the stem cell stocks.  They will likely follow the general markets down in the
next few weeks, the news and catalysts that have propelled these stocks are over
for the short term, and in the clear light of dawn, they remain developmental
companies with no near term profitable future.  

 

Last
(Random) Chunks to Chew : Since Bush took office in January of 2001, it’s been a
lot of nowhere or down for Wall Street’s bulls.  The Dow 30 Industrials were
around 10550 and are now 10392, down 1.5%.  SPX has gone from 1330 to 1167 —
down 12.25%.   NDX has gone from 2720 to 1503 today or down 44.7%.  The US
Dollar has gone from 111.27 to 83.28 today — down 25.15%.  Ten Year Treasuries
have gone from 5.25% to 4.14% today or a drop of 21.11%. 

On the
bearish up side, gold has gone from 265 an oz to 427.3 — UP 61.24%.  British
Pound has gone from 1.4636 to 1.8731 — up 27.98%.    Budget deficit has gone
from 166.7 billion surplus to approximately 445 billion deficit. 

What
does it all mean?  You do the math . . . let me know.

 

Peter’s Picks: Gone to Ground

  As noted, I cleaned out
most of my remaining stock positions on Friday.  This includes ASTM, which had a
great week cresting four bucks, and which I sold to take profits.   It also
included CPTC (for now) which fell back below $5 and shows signs of continuing
weakness or consolidation.  Both will remain high on my watch list.

David’s Pick: Still Favor Cash.

Peter Navarro is a business professor at the
University of California-Irvine (www.peternavarro.com). 
David W. Aloyan is a managing members of Platinum Capital Management.   Matt
Davio is a managing partner at the hedge fund, Infinium Partners.

For general money management services, contact David
at

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

infinium@peternavarro.com.

For investment
management, analysis & insight, seminars, books, plus much more…visit our new
website at:

https://www.platinumcapitalmanagement.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
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