Navarro’s Broad
Market Outlook: A No-Profit Rally

I’ll be brief this week
as Matt has generated lots of good food for thought below: There’s much ado
about the current rally, but it is not exactly a rally that it is very easy to
make money in — propelled as it is in many ways by energy and housing stocks
that, at least in my view, are too speculative to hug the long side on.

What I found most
interesting this week was the Bearish Chorus among the aging Bulls that
Barron’s trots out every six months to take the pulse of the market.   Almost
all of these New York-centric button-downs see slow growth ahead for the U.S.
economy as it is being steadily worn down by rising rates and high oil
prices.  Hey, sometimes, even they are right.

This Week’s Market Movers

It’s a pretty quiet week in
Lake Woebegone — and on Wall Street.  We’ll see some new data on new and
existing home sales but you should expect the current robust patterns to
continue as we move into the middle of the summer buying season.  Other than
that, there’s only durable goods to provide some clues — but this report is
too volatile to ever take seriously.

Portfolio Musing

            I always know
when the market is ugly when sound technical plays fizzle out rather than
following through.  That’s what happened for me with ADSX, which I dumped
before it could get costly.

            As for Chiron (CHIR),
which I’m holding 2007 45 buck calls on, it didn’t help my cause that the
company announced lower production targets for flu vaccine for next year.  
But that’s why I always get LEAPs way out in time — so I don’t have to worry
about it.

 

Hedging Your Bets
With Matt Davio: Toil and Trouble

            Volatility dipped
to new 14-year lows this week, as we went into the “triple witch” options
expiration of this June — the concurrent expirations of  stock options, stock
index futures, and options on stock index futures that happens four times
annually, on the calendar.

With
volatility levels this low, my eyes continue to focus on the new paradigm
“four horsemen” stocks:  Google (GOOG); Chicago Mercantile Exchange (CME);
homebuilder and mortgage company NVR Inc. (NVR), and Sears Holdings (SHLD). 

“Four
horsemen” is a term first coined in the late 90’s by Mad Money‘s Jim
Cramer, former head of the Cramer/Berkowitz hedge fund.  He used it to
categorize the former paradigm stocks of  Intel, Yahoo, Cisco, and
Microsoft..

Today’s
four horsemen are GOOG, CME, NVR and SHLD make up the new hot sectors
of the market.   Google is the upstart latest-mania-IPO from last summer.  The
Chicago Mercantile Exchange represents the last four years of upside in
commodities and their trading markets.  NVR covers the homebuilder/mortgage
beat.  Sears Holdings is a  product of the latest Retail merger of Eddie
Lampert and his ESL Investments, Hedge Fund.

These
stocks remain important to the current two-plus year rally we started in March
of 03 in that they represent sectors and businesses that have benefited from
the low interest rate environment that Greenspan created for the U.S. economy.
The other key point to these stocks is that the fast/smart/retail/index
money/institutional — okay, almost all market money — is chasing these
high multiple fliers, which all happen to trade at price tags of at least $150
a share.  Apparent volatility tends to be greater in these names due to the
high price tags.

GOOG
currently trade in the 270’s, NVR in the $800’s per share, SHLD @ 150’s, and
finally CME trades in the 250’s.  Each of these stocks represent the easy
or fast money, in my opinion. 

 

Punch
Line #1: As long as they stay in their uptrend, my guess is that we
will remain in a bull cycle within a longer-term Bear Market. 

 

***************************

Now let’s
take a look at one of the strongest stock groups where NVR Inc. resides — the
home-builders — of which almost all have been rising, if not surging.  I
follow seven of the leading home-building stocks, and each one has been
rallying.  Yet only one of these stocks pays a dividend of as much as one
percent.  That means, if you buy a home-building stock, you must hope that it
will rise.  Otherwise, if it stalls or if it declines, you have no reason to
hold it — it pays you nothing, and the only thing you’ll gain is losses.  Let
me demonstrate. Below are some leading home building stocks and their dividend
yields:

 

NVR (NVR Inc.) @0
yield.

KBH (KB Homes) dividend yield 1.08%.

CTX (Centex) at 0.23% yield.

LEN (Lennar Corp.) at 0.91%.

PHM (Pulte Group) at 0.25%.

RYL (Ryland Group) at 0.34%.

TOL (Toll Bros.) at 0 yield.

BZH (Beaser Homes) at 0.75%.

 

What does
this tell us about the markets today?   To me, it says that easy money is the
key theme here.  This easy money is driven by the low interest rates that the
Fed has provided us since 2000, which has provided for the growth in
homebuilders and equity refugees.  

Also,
easy money has been made in Retail stocks as Americans continue to buy, buy,
buy.  SHLD is actually a composite Real Estate play with the merger of Sears
and Kmart, so that can also be considered a RE play. 

Finally,
Commodities have enjoyed a nice five-year run up in prices, which can be
reflected in the Chicago Mercantile Exchange.  GOOG is the latest on cutting
edge technology, just like we had Iomega in the 90’s, Netscape, AOL… all
before the original “four horsemen.” 

Punch
Line #2: I believe you need to carefully watch these names to see when the
actual shift occurs in the easy money.  As interest rates rise, all “four
horsemen” should begin to fall, and we will then look for leadership in the
next paradigm. 

Below I
have posted the charts of all four stocks, and I believe the key thing to
focus on is that all of the charts are weekly in nature and show clear
up-trends.  Until these trends are broken, they will remain the “fast money”
names.  What will take them down, I can’t tell you.  But they can go up
— typically longer and farther than anyone can imagine today. 

I do
happen to believe every name shown is a speculative name, as not one of them
provides a rental payment or dividend for holding the stock.  So its pure
speculation if you want to play and own these four names. 

            NVR remains in an
uptrend above 700. CME remains in a long term uptrend above and around
180-190.  SHLD remains locked upward above 105 or so.  Finally, GOOG the
youngest of the bunch in the stock world, remains upward as long as it stays
above a 180 price range. 

            These stocks are
names that intrigue us in our Red Rock Capital Fund — and form another measure
of market temperature.  These stocks seem scary to me, and regularly need to
be updated and gauged for market temperature and emotion.  But it is very
important in all cycles of all markets to understand who and why your leaders
are what they are, before making investment/trading decisions. 

 

 

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.

Peter Navarro is a business professor at the University of
California-Irvine (www.peternavarro.com). 
Matt Davio is a managing partner at the hedge fund, Infinium Partners. For
investment management services, contact Matt at
infinium@peternavarro.com.  
Contact Peter at
peter@peternavarro.com