If Things Are So Good, Then Why…

• June 16, 2003
• Peter Navarro

Market Trend: Up

Market
Outlook: Odds in favor of a pullback

Peter’s
Pick: Internet Initiative of Japan  (IIJI)

The Broad Market Outlook: If things are so good, then why…?

“The Fed is trying to keep the economy afloat while we are working ourselves out
of debt.  The problem…they’ve tried to cure the problem of too much debt by
adding more debt.  It all looks good as long as rates stay down….  We are making
savings worth zero and are telling people to borrow.  We are doing just the
opposite of what we need to do.” — Ned Davis in this week’s Barron’s

As more and more bulls pile on to the latest rally, there still is no answer for
this paradoxical question: If the economy has turned the corner and the stock
market is forecasting an economic upturn, why is the Federal Reserve about to
cut interest rates by another 50 basis points? 

Perhaps the answer is that Wall Street is certain that the only thing missing
from the economic recovery is one last cut by the Fed.  And even without that
cut, there is now almost what seems like a surfeit of GDP stimulus — from fiscal
tax cuts and a monetary liquidity gusher to an export-boosting weak dollar.

Still, we are not yet satisfied that the paradox posed by the Fed’s question
will be resolved in a bullish fashion.  Our concerns begin right here in
California with a very weak (Northern) job market and an impending meltdown of
the state budget — with collateral job cuts, tax hikes, and
instability/volatility.  We also share the concerns of Ned Davis in the
quotation above.

So…we continue to see this latest rally as a bull feint in a longer term secular
bear market.  At a minimum, we expect a pullback (PERHAPS TO BEGIN IN EARNEST
THIS WEEK), the nature of which will (finally) reveal whether the longer term
trend has truly changed from bear to bull.

The Week’s Macro Data Market Movers:

The
Macroeconomic Calendar

* Potential major market movers in red

No big news on Monday may make it difficult for the
market to move up.  On Tuesday, the deflation hawks will read the CPI tea leaves
carefully while the housing bubbleheads will do the same for housing starts and
building permits.  Any slowdown in either housing starts or building permits
would be very unexpected given the latest leg down in mortgage rates and housing
stocks would react very negatively.  As for industrial production and capacity
utilization, the market will be looking for some further confirmation of the
good news embedded in last week’s ISM report.

On Thursday, the market would wildly celebrate a drop in jobless claims below
400,000 — but such a celebration is unlikely  — while a job in claims would
drive the market sharply down.  Look for the budget deficit report to show a
deficit situation worse than we have thought — providing no fuel for the bullish
fire.

Peter’s Pick: Internet Initiative Japan (IIJI)

According to Market Edge, “Internet Initiative Japan (IIJI)
provides Internet access and related services, leasing lines from telecom
companies to provide high-capacity network services in Japan and from Japan to
the U.S. Also offers network consulting, systems integration, Web hosting, email
and content development and distribution services.”  This stock is showing solid
technicals.  It is a way of diversifying into Asia.  Plus, unlike many U.S.
internet companies, this one is a full service company with many different
revenue streams.   Finally, regardless of whether the economy recovers in Japan
or globally, the Internet will continue to enjoy robust growth rates.  NOTE:
Consider this only on a pullback as it is likely to be a rough week for Japanese
stocks!

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.