The Five Macrowaves of Fear

• June 17, 2002
• Peter Navarro

Market
Trend: Down

Market
Outlook: Bearish

Sector
Watch: Bonds (+), Telecom (-)

Peter’s
Pick: NXTL

Continue
to “Wait” to Cash

The Broad Market Outlook

This
is a slow, grinding 1970s-style climb down the mountain. Everybody keeps waiting with morbid fascination for the climbers to once
and for all plunge to their death — the much-awaited capitulation. Instead, our intrepid explorers just keep
zigzagging down — with an
occasional upward traverse. 

What
we will explore in the coming weeks, of course, may well be any new lows below the
Sept. 11 lows. Indeed, the Five
Macrowaves of Fear remain in place:

• Apocalypse (Maybe) Now — can it possibly
  do any good to have TWO movies out making money off the specter of a nuclear
  bomb going off in a U.S. city?
• The
  “Less Twins” — the Job “Less” and Profit “Less” recovery.
• The Weak (Sister) Dollar.
• And
  no doubt amplified by the Andersen convictions, the Enron-esque pall over the
  financial markets.

The
only piece of this bearish puzzle that happily doesn’t fit was last Friday’s
astonishing bounce back from the curbs in place brink. When Mr. Market
sloughs off bad news, Hope does indeed glimmer — if not
spring eternal.

Still, keep your money in your pockets in this highly volatile situation and
obey the principle of: “Speculate, Never Gamble.”

The Macro Data Market Movers

A
second week in a row on the nothing data front means no fuel to move the market.yes”> This week, it’s the CPI and Housing Starts on Tuesday. Both should offer good news that will hardly surprise or help — low
inflation and robust (party before the Fall of Rome) housing starts. 

On
Thursday, May’s “Lagging Indicator” — oops, Leading Indicator — report
will offer us nothing new while the danger of the May Treasury Report lies in
possible new evidence that our budget deficit is growing faster and bigger than
we thought. 

More
subtly on Thursday, the most sophisticated of the macrowave investors will
carefully parse the Trade Report.  There
will surely be a large trade deficit, but will it unexpectedly shrink or
increase? If so, why?

Any
increase in the deficit will further weaken the dollar. If an increased deficit comes from an increase in exports, that, however,
will be bullish as it means both a domestic stimulus for the U.S. and signs of a
growing recovery in the countries where our goods are being sold. 

Sector Watch

Housing
continues to play the perverse and unaccustomed role of a defensive sector
rather than a leading indicator of recovery. The
worse the news gets on the economic front, the longer it will be
before the Fed raises interest rates and the more people flee out of the market
into hard assets like housing. Still,
none of the homebuilders are busting through their 52-week highs — a clearly
bearish, bubblish sign. Autos and
retailing are clearly in trouble on the heels of the latest news of weakening. But the Bear of the Week must go to telecom. 

With
Sprint’s news last week of a dramatic falloff in its subscriber estimates, it
has become crystal clear that no good can come of this sector in the “short”
run (pun intended). Indeed, one
macroplay is to go short the Telecom sector as represented by the
holder “TTH.”  

Art of the Macroplay: Nextel

This
is a high-risk position trade macroplay with at least a several-month horizon
based on two emerging regulatory macrowaves. It is also a macroplay that runs counter to the current abject weakness
in telecom — a tough tide to swim against.

The
first macrowave: With
the entire telecom sector in the overcapacity toilet, you can expect mergers
and acquisitions to reduce this industry less than half of the existing players
post 2/03.  (Note: Liabilities include $14B in debt, PLUS Nextel International, which
is hemorrhaging in Argentina and may go Chapter 11.)

The
second macrowave is even more interesting and was the focus of a June 11 Wall
Street Journal
article. Apparently,
calls from Nextel subscribers are interfering with the mobile communications of
police departments and other public safety agencies in many cities around the
country. The problem is that
Nextel’s spectrum is a slapped-together, anything-but-seamless band that
weaves in and out of the public’s safety spectrum.

Nextel
has proposed solving this serious problem with a spectrum swap that, according
to Nextel’s rivals, would leave Nextel with a very sweet, larger and
incredibly valuable piece of the spectrum pie. With a coalition of spectrum users and Nextel competitors that includes
heavy hitters like Fedex and Verizon opposed to the swap, the odds are low that
Nextel will prevail. BUT if the FCC
buys the Nextel argument that this is the only way out, Nextel’s shares could
double or triple overnight.

One
way to play this macroplay will be to just load up on some Nextel’s penny stock-priced shares and watch and wait. There
is probably less downside now than up, so it’s a decent long-term play. The alternative, of course, is long-term options, which will keep more of
your capital in the game for other plays. As
always, this will be your play — not ours.

 

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.