The Commercials Are Rarely Wrong…And Here’s What They’re Doing Now

  • July 28, 2003
  • Peter Navarro

Market Trend:
Up

Market Outlook:
Tippy Toppy

Sector Watch:
Precious Metals up, Real Estate and Finance down

Peter’s Pick:
Cure for the Common Portfolio
(
MTXX |
Quote |
Chart |
News |
PowerRating)


The Broad Market Outlook:
Patience Wears Thin


We
Enter This Week: Neutral


The three major indices reversed their losses for the week
on Friday to finish the week in the green. Prices still remain broken out of
their trading ranges on all three major indices, but have stalled and entered a
consolidation period. We know at this point your patience must be wearing thin
waiting for this “top in the market” we have been warning about, the market
knows this, so please sit tight and let the market play itself out. 


It appears evident that most everyone is bullish at
this point, and those who are not bullish want to convert. This is classic
mania. Every newspaper and magazine cover, the pundits on television and radio,
Wall Street strategists and analysts, investor and advisory polls, friends,
family etc.–bullishness abounds!  Jim Cramer says, “This is a sanity,
rationality rally.”  Larry Kudlow, when asked if higher interest rates will stop
the rally, says…”No!  Buy the ranch!” 


What The Bulls Say…



  • The weak dollar is good for our exports.



  • Higher interest rates and a steep yield curve
    signal goods times ahead for the economy–future demand for capital by
    businesses.



  • P/E ratios are not high; earnings are at extreme
    lows making them appear high. Earnings are beginning to grow now, so the P/E
    ratio will shrink.



  • Huge monetary and fiscal stimulus is always the
    cure for an ailing economy and stock market. The tax cuts will put money in
    the hands of the people, who will turn around and spend or invest it back into
    the economy.



  • The low interest environment will force businesses
    to want to invest through capital expenditures. Further, it will force
    investors into buying the bonds and stocks of these corporations in hopes of a
    better yield. There are no signs of deflation or inflation



  • The stock market is a leading indicator for an
    economic recovery, and prices are going up!

What The Bears Say…

  • The weak dollar is not good.  It’s
    inflationary, as we import more than we export. 

     

  • Higher interest rates are signaling just that,
    higher interest rates ahead.  This is due to the massive budget deficits, and
    aggressive monetary policy that drove rates down to 45-year lows creating a
    “bond bubble” that has started to burst.

     

  • The P/E ratio of the market (SP-500) is at 33,
    which is a historically high level.  Earnings have improved by cost cutting,
    which can’t be sustained.  The revenue growth is just not there.  The implied
    P/E for the market using the 10-year bond at 4% is 25, and a rise in rates
    will cause this to shrink.

     

  • Interest rates have been relatively low for
    quite a while, and still few signs of business investment.  Low interest rates
    have forced some investors towards corporate bonds and stocks—