This Week’s Outlook, Plus, Important Macro Trends

• January 31, 2005
• Peter Navarro

The Big Picture Investor: The Grim
Reaper and Big Brother

 

Navarro’s Broad Market Outlook: GDP Hangover

Last
week, I walked ye loyal readers through some GDP basics and explained why all
four components of the GDP — consumption, investment, government spending, and
net exports — are in trouble.  Right on cue, last Friday’s GDP numbers came in
soft — and threw another “kill the early in the week rally” wet blanket over a
stock market suffering one of the worst Januarys in modern history.

Next
week’s biggest market mover is likely to be the Federal Reserve.  Me thinks it’s
blowing it with its insistence on this latest aggressive round of interest rate
hikes.  Right now, these hikes are scheduled to go on until we get from 2.25% to
a 4% “neutrality — that’s SEVEN more 25 basis hikes to look forward to in 05. 
Sure, the stock market will rally on that, he said dripping with sarcasm.  As
for what’s a trader like me to do, catch me further down this column in Peter’s
Portfolio.

Aloyan’s Technical Take: Beware of the “Big Spin!”

All
three major indices (“Dow”, S&P, and Nasdaq) finished just (barely) in the green
last week, finally breaking their losing streak for 2005.  The Dow closed up 34
points (.33%) at 10427, the S&P 500 was up 3 points (.30%) at 1171, and the
Nasdaq up 2 points (.08%) at 2036.  Resistance is around:  10471 and the
10500 area for the “Dow,” the 1185 and 1196 for the S&P 500, and 2048 and 2075
for the Nasdaq Composite.  Support is around:  10241 and the 10100 area
for the “Dow,” 1162 and 1142 for the S&P 500, and the 2000 level and 1971 for
the Nasdaq Composite.  

My
sector breadth indicator turned positive last week, with 55% of the sectors in
the green.  Showing the most strength, energy and the Tobacco made new closing
highs for the week. Meanwhile, the Real Estate and the Internet sectors led the
worst performers.  The Dollar was up slightly on the week, again, supported by
continued strength in bonds (with the 10Yr Yield closing lower at 4.138%). 

My
trend indicators remain “bearish.”  My breadth and momentum indicators remain
“bearish” but have flattened out a bit on the short-term, and there is no “buy”
signal yet.  My volume indicators likewise remain “bearish” while my sentiment
and economic/fundamental indicators continue to support a defensive position. 

Important Macro Trends: China is
looking to diversify away from the U.S. Dollar.  This will eventually have a
negative impact on the U.S. bond market, which will ripple throughout the rest
of the financial markets. 

In
Iraq, the big question is whether a democracy can be created under the rule of
the Shiite religious fundamentalist group most likely to win the election.   I
think not.

The
“urge-to-merge” syndrome is being spun as a bullish sign.  It is anything but
bullish.  Why?  Corporations are cash rich, debt costs are low, and stock prices
have been favorable.  Therefore, they are reaching for more productivity and
increased capacity utilization through consolidation (more job cuts, plant
closings etc.), and non-organic top-line revenue growth.  This elimination of
competition eventually hurts the consumer in selection and pricing, eventually
becoming inflationary.

Hedging Your Bets With Matt Davio: Water Water Everywhere

Where
is the pulse to this market? A defibrillator is needed.  Call Guidant and
Medtronic and a good Doctor.   

Throw
in Thain over @ the NYSE ironically talking about expanding hours. Why not
shorten the hours instead from 10-2pm EST?  Or better yet, supplant the floor
traders and go electronic.  You know it will happen Mr. Thain so why not do it
sooner than later and get rid of the fat in the system. Say bye bye to the Floor
Brokers for the NYSE and go electronic. 

The
pundits say the Iraqi elections are holding everyone back.  If the market
rallies off of their success, I will be a seller as Iraq ultimately has nothing
to do with the overall situation in the US economy in my book.

The Recap: SPX up 3.5 pts, NDX down 3.2
pts, the INDU up 35 pts, the all important BKX (Banking Index) down .25 pts for
the week.  Those are points not percentages.  The market barely moves as volatility
levels are near 13-year levels. This suggests a long period of no
movement and less excitement over US Capital markets.

Next week’s outlook: Lots more earnings
and financial info.  If the current spat of “strong” earnings and M&A activity
(PG over G), can’t get this baby rolling upwards, I don’t know what can?

 Tuesday brings the next Fed Meeting and bets are on as to whether it will be 25
or 50 basis points.  On that note, the Fed has painted itself into an unenviable
corner.   Even the guys on America’s Ugliest Kitchens would have a difficult
time cleaning Greenspan’s cheap money mess up. 

We are
in the middle of a swing that still leaves more room to the downside then
upside.  W pulling all the troops out of Iraq and rotating them to Iran? Another
80 billion added on to the expanding deficit?  Can the market salute that? 
We’ll see.

Stock picks anyone?  I am starting to
watch the water stocks, as there is starting to be more buzz about water
as a more valued commodity.  I can see water taking over oil’s value in our
lifetime. 

INSU
is a good name that just got killed on Friday as they missed on their earnings.
I will be watching that 04 low of 14.5 on it as the stock closed Friday @ 16. I
think there could be a good long term purchase at some point on this name. I
haven’t dipped my toes in the water, but I will be watching the name over the
next few weeks in response to their warning. 

 

Peter’s Portfolio: The Grim Reaper and Big Brother

Glad I excised both ASTM and
CPTC from the portfolio with healthy profits as both continue showing signs of
weakness, ASTM more than CPTC.  I will reload on CPTC once its current
retrenchment is completed for reasons previously documented.

Looking forward to the WMB
earnings on Feb 3. I’m expecting a very strong quarter that beats  analysts
estimate and strong guidance to prople this puppy up to the $20 mark where it
belongs.  If earnings disappoint, adios…………….

New Portfolio
Entrants: With the market’s uptrend clearly broken, it
no longer makes sense to play the penny stock game.  It’s just too difficult for
any stock to rise above the market when the market is heading down.

Ergo, I embark now on a
switch in strategy to explore various “macroplays” as I have in the past.  I put
two in my portfolio last week.

My Grim Reaper:
Sinovac Biotech (SVA) is a Chinese company that has the inside track on
developing a vaccine for Avian or “bird” flu.  Cases are cropping up with
increasing and disturbing frequency in places like Vietnam and Thailand and the
World Health Organization thinks it’s only a matter of time before the world
experiences a “pandemic” flu event much like the one in 1918 that killed more
people than World War I.   The stock is high risk.  I’m tapering in with a
smaller buy and will wait to add if it begins to move.

My Big Brother is
Watching: The article in Investor’s Business Daily on
Progressive Gaming’s marketing of Radio Frequency Identification gambling chips
gave PGIC a nice little bump on Friday.  These chips are indeed the wave of the
gambling future as they allow a casino to better track gambling patterns in the
house, spot cheating with counterfeit chips, and cater to regular customers. 
I’m likewise tapering in very conservatively as the stock’s technicals are
weakening — but this new news may reverse the trend.

 

David’s Pick: Still Favor Cash.

Peter Navarro is a business professor at the
University of California-Irvine (www.peternavarro.com). 
David W. Aloyan is a managing members of Platinum Capital Management.   Matt
Davio is a managing partner at the hedge fund, Infinium Partners.

For general money management services, contact David
at

platinum@peternavarro.com.   If you are interested in hedge fund services,
contact Matt at

infinium@peternavarro.com.

 

For investment
management, analysis & insight, seminars, books, plus much more…visit our new
website at:

https://www.platinumcapitalmanagement.com

 

 

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.