Oil Republics And DVD Pirates

• April 15, 2002
• Peter Navarro

Market
Trend: Ain’t None

Sector
Watch: Semiconductor Manufacturing (+), Housing (-)

Macroplay
of the Week:
(
ROXI |
Quote |
Chart |
News |
PowerRating)

Weight
towards Cash

The Broad Market Outlook

If the
oil markets and Wall Street truly were comforted last week by the military coup
in Venezuela that deposed left wing President Hugo Chavez, then this week is
going to be a very bad week. At the
time of this writing, it is unclear whether Chavez will be restored to power,
but pro-Chavez forces were able to riot enough to topple the new president in
less than 48 hours. 

The
fact of the matter is that the only thing missing in Venezuela’s banana
republic is a lot of bananas. It’s
a typical South American country, which is to say a small elite portion of the
population along with a relatively modest middle class owns most of the wealth
and the rest of the population is dirt poor. Of course, it was the large masses of these poor quite literally pouring
out of the ghettos of Caracas that came to the defense of Chavez, and at least
from an investor’s point of view, there can be no good end to this. 

Either
Chavez is assassinated and Venezuela implodes along rich and poor lines. Or Chavez is restored and he continues his pro-Castro, pro-Iraq,
destructive unraveling of the one thing that keeps Venezuela going — the cash
cow of an oil industry that provides the fourth largest flow of crude to the
world markets.

On the
other oil front, namely, Israelis vs. Palestinians, Colin Powell is going to try
and pull a rabbit out of helmet, and the only optimism here must spring from the
fact that of all the last chances the Israelis and Palestinians have had to
resolve their conflict, this is likely to actually BE the last one. My guess is that we will see some kind of apparent breakthrough that will
soothe the markets — but it is hard to imagine any peace pact lasting because,
frankly, there are Islamic forces in the region that will NEVER cease their
terrorism until Israel is extinguished.

On
that happy note, let’s move to a longer-term danger. If we buy into the notion that the high rates of non-inflationary growth
were attributable to high rates of productivity that were attributable to
spectacular gains from technological innovation, we MUST now begin to worry
about stagflation. As more and more
tech companies issue their long-term forecasts, virtually all of them are
offering substantial downward revisions of tech spending.
That means, down the road, that productivity gains must falter, and it is
only through increases in productivity that the GDP and wages can grow in real,
inflation-adjusted terms. (More
about this in future columns.)

Related
to this drop in tech spending, the once receding danger of a double-dip
recession is now once again on the rise. Last
week’s fall in consumer confidence coupled with the aforementioned downward
revisions in tech spending suggest a classic aggregate demand shock that could
slay both the young economic recovery and the early bull phase of the market
that we THOUGHT we were in just weeks ago.

This
all said, these ongoing troubled times would be an excellent interval to
continue weighting the portfolio mostly toward cash until we get some signal of
resolution on several of these fronts. If you get fidgety, go do some daytrading on purely technical movements
as the current volatility can be profitable.

Sector Watch

This
week’s cover story in Barron’s amplifies our prediction of a possible
collapse in the housing market and is recommended reading for all serious
traders. True, continued oil price
shocks will continue to delay the inevitable Fed rate hikes and that will stave
off the housing market’s collapse for a bit. But at the core of all of this, we have a lot of American consumers who
refinanced their houses NOT to lower their mortgage payments, but rather to suck
equity out and use the cash to buy more “stuff.” This equity money has been one of the primary fuels of the strength of
the consumer sector. Accordingly,
if housing prices begin to fall after consumers have already lost a lot of money
in the stock market, their spending patterns will ratchet significantly
downward. 

The Macro Data

As
this column suggested last
week, the Producer Price Index did indeed come out
relatively hot, but as we noted, the rise came from an increase in “non-core”
inflation because of increases in BOTH oil and food. The food part is what we missed. 

All
this mild and dry winter weather has apparently not been good for the coming
planting season. We’ll keep a
close watch on this as a combination of both oil and food shocks would be
stagflationary. The other data
point of note last week was the unexpected fall in the University of Michigan
consumer sentiment index. We’ll
watch that, too!

This
week, watch Tuesday’s Housing Starts for any sign of faltering — or
continued strength — in the sector, while on the same day, the Consumer Price
Index should reflect at least some of the non-core inflation of percolating up
from the PPI. On the supply side,
Tuesday’s industrial production and capacity utilitization reports should
likewise be of interest. Companies
have been building inventories and raising production in anticipation of the
recovery — and thereby fueling the recovery in the process. Any setbacks in these numbers would be the first whiffs of a double dip.

Macroplays of the Week: Corn Flakes and Crude
— CDs and DVDs

Hey,
kids! As a fascinating
little story in IBD noted last week, it takes more energy to plant corn than soybeans, so a lot of farmers may switch this spring to soy, and thereby drive the
price up. Let me know if you figure
out a way to make money on this, short of shorting the big box cereal makers.

On a
more tradable note, we have previously noted the excellent strategic position of
Roxio in the emerging DVD burner market. Roxio
has an absolute lock on the CD-burner software market, with over 70% of market
share. Combine this market power
with the startling statistics that we are now buying more blank CDs than
record CDs and that the recording industry saw a steep drop in sales last year,
and you can see why Roxio may wind up as a ten-bagger. 

This
is all the more so because it is using its technology and distribution channels
to go after the emerging DVD-burning market. So just as the recording industry has gotten it in the shorts, watch out
movie industry. My main caution on
this one is that if the broad market tanks, it will be difficult for any stock
to make a big move up. So use your
money and risk management tools!!!!

Here’s
the chart. The technicals look
gorgeous. IBD has got it best in
its group and fourth out of 20 stocks in fundamentals.

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 my web site https://www.peternavarro.com. We’d love to hear from you.

Also,
if you are interested in trading a simulated portfolio to test ideas, you can
get a free trial of my favorite simulation software Stocktrak. Visit https://www.stocktrak.com/navarro.html The company also has a regular stock challenge. Strut your stuff. (We have
no financial interest in this. Just
a good piece of software.)