Macro 202: Wait Towards Cash
Market Trend:
Ain’t None, Negative Bias
Sector Watch: Look, Don’t Trade
Macroplay of
the Week: Go Long Any Crash
Continue
to Wait/Weight towards Cash
The Broad Market Outlook
To understand
the remarkable erosion in the stock market over the last six weeks or
so, let’s go back to our macro basics. About
six to eight weeks ago, the market prospects looked very rosy as we were clearly
making the transition from late bear to early bull.
This transition was based on:
- Rising consumer confidence and a
very resilient consumer - The accumulation of business
inventories and a collateral production spurt in anticipation of recovery - A fiscal policy stimulus in the
form of both tax cuts and higher defense spending, and - The albeit slow but seemingly
inexorable recovery of the world economy, which would boost U.S. exports
In other words, and in the macro
framework of John Maynard Keynes, ALL four
components of the GDP were beginning to hit on all cylinders — Consumption (C),
Investment (I), Government Spending (G),
and Net Exports (Imports — Exports).
This, of course, is good news for stocks because it augurs higher
earnings. Stripped of short-term technical considerations, stock prices reflect
nothing more than expectations about future earnings.
Unfortunately, over the last six weeks
or so, all four elements of the GDP equation have reversed — and taken the
market with them. Consumer confidence is
weakening, no doubt because of uncertainty over war in the Middle East, spiking
oil prices, and the strength of the recovery itself — even as unemployment
continues to creep up. Business
investment, as revealed by one earnings report after another is retracting —
as executives worry that their initial production spurt and inventory building
may have been a serious mistake.Government spending continues apace BUT
it now appears that tax collections will be billions lower than anticipated. This
signals coming deficits; deficits must be financed by selling bonds; this drives
up interest rates and chokes off business investment further. No wonder Wall Street
is in a funk.
This is a long way of saying that the
macro environment is signaling that you should continue to keep you powder dry
as this column as been advocating, i.e., stay in cash, do your research, and be
ready to move when the market resumes a clear trend — either up, which remains
a possibility, or down, with a panic selling and new lows a new real
possibility.
The Macro Data
Last
week, we accurately predicted that the University of Michigan consumer
sentiment index would fall rather than rise, as the consensus estimates had it.
This week look for more follow through (or down, as the case may be) with
the Conference Board’s Consumer Confidence measure on Tuesday.
As for last week’s GDP numbers, it was a case study in why investors
need to look beyond the bullish headlines (“GDP
GROWS BY MORE THAN 5%”) and understand that stripping the growth of
inventory effects rather than incremental production to meet demand, means that
growth was far slower.
The key report this week will be the
Institute of Supply Management or “Purchasing Manager’s Index.â€Â
Consensus estimates put it with a small drop from 55.6 to 55.0.Â
Any bigger drop will jolt the markets, and a bigger drop would hardly be
a surprise here.
Finally, the Jobs Report flies again
on Friday, with consensus pushing the unemployment rate up yet again.
This report is the best chance for bullish news — IF
it can somehow reflect more stability or even a lowering of the rate.
But don’t hold your breath.
The calendar is packed but with few
reports of meaning. The market cares
little about Durable Goods on Wednesday and there should be few surprises in the
new and existing home sales numbers on Wednesday and Thursday.
Friday is the big day.
Consensus estimates put the GDP coming
in at a robust 5%. Anything significantly
less, and the market tanks. My
BIG SLEEPER this week is the Michigan Consumer Sentiment.
The consensus estimate has it rising, but don’t be surprised if it goes
the other way and the market reacts badly. So
watch your portfolio very closely Friday a.m.
Sector Watch
There are a few sectors that are hot (as
we pointed out last
week) from gaming to health care, while housing continues to romp.
But forget all that for now and let it be just a spectator sport, as
market uncertainty is just too high.
Indeed, housing stocks are rallying on
the bearish reality that higher oil prices and a weakening economy postpone the
day when Greenspan cranks interest rates back up.
This is a short waiting to happen.
Meanwhile, health care and medical
stocks are benefiting partly from a bearish rotation into these non-cyclicals
but partly also from projections of rising health care.
When Wall Street figures out that COSTS are
likely to rise as fast or faster than revenues for this sector, it will become
far less enchanted. As for gaming, this
one is a puzzle. Our wild guess is that
in the wake of 9/11, people are living a little bit more for today — and
ain’t no place to live in the present like the gaming world.
Macroplay of the
Week: Buy Into Any Panic Selling
Sit on the sidelines and if, by
chance, we get the wave of panic selling that we have never really had to signal
the bottom of the bear market, you might try making a few bucks on the bounce
back. But be VERY careful
and take any profits early.
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.
Note: There
will be no column next week as I will be in Miami, delivering the keynote
address at the Miami Herald’s annual money conference.
This column will return in two weeks.