Through The Weak Dollar Prism

  • May 20, 2002
  • Peter Navarro


Market Trend: Cautious,
Looking to Buy

Macroplay of the Week:
 
(
EWJ |
Quote |
Chart |
News |
PowerRating) (+),
(
EWL |
Quote |
Chart |
News |
PowerRating)
(+),
(
EWU |
Quote |
Chart |
News |
PowerRating) (+),
(
EWZ |
Quote |
Chart |
News |
PowerRating) (-)

Watch List: 
Concurrent Computer
(
CCUR |
Quote |
Chart |
News |
PowerRating), Seachange
(
SEAC |
Quote |
Chart |
News |
PowerRating),
Entegris
(
ENTG |
Quote |
Chart |
News |
PowerRating)

Sector Watch:
Housing, Housing, Housing — Will bubble burst?


The Broad Market Outlook


OK, let’s try this again,
namely, the
transition from late bear to early bull in the stock market cycle. We almost
made that turn two months ago but then a Middle East crisis put the oil shock
brakes on the recovery. Now, it looks like we might again be stabilizing. 



  • Consumer confidence has swung back up;
    retail sales were strong last week, indicating the consumer may be OK. 



  • There was no sign of any precipitous
    drop in industrial production last week so maybe business will start building
    inventories again, in response to strong consumer demand after the recent
    hiccup. 
     

  • And we got a nice surprise last week
    with an unexpected boost in exports, which will be a nice GDP stimulus as
    well. 

     

  • That leaves only government spending
    as the weak link in the Keynesian GDP equation (Consumption plus Investment
    Plus Government Spending + Net Exports).

Sure, Federal government spending is
strong. BUT state and local government treasuries
have been hit very hard by the recession and this is the year the contractionary
tax bill comes due. If California is the bellwether, it intends to “solve” its
problem by raising taxes — a decidedly contractionary response. Bottom Line:
This could be the week to start nibbling at all of those good buys you’ve lined
up while sitting on the sidelines waiting for the clouds to clear.  Just
continue to be careful.

The Macro Data

The
good — and bad — news for the week is that the market is mostly on its own
animal spirits — with little scheduled news of note to either lift (good) or
depress (bad) the indices. Monday, we get the Index of Leading Indicators, which
ought to be sued for misrepresentation because it’s actually a lagging
indicator. Durable goods flies on Thursday but this is even more worthless —
volatile as it is — although the press always likes to make a big deal of it. 

So… the only real news of the week is likely to come on Friday with new
home sales. Anything less than consensus may begin to prick the housing bubble
postulated in earlier editions of this column. And by the way, the Japanese
equivalent of the Federal Reserve meets on Tuesday to discuss interest
rates. Watch it for reasons articulated below.

Sector Watch

Yes,
keep watching whether the housing bubble will burst. In the meantime, my
“sectors” of the week are Europe and Asia vs. the US in the soap opera called
“As the Dollar Turns Down.”  Indeed, the big buzz now is that the dollar is
showing signs of weakness — it fell significantly last week. 

Watch
this show with great interest. Here’s just some of the arguments pro and con for
a strong or weak dollar. It’s too early to tell which set of arguments will
prevail, but the smart money now is on a prolonged slide (but hopefully not a
precipitous drop that would destabilize the whole global economy).

 


Strong Dollar


Weak Dollar

The U.S. is THE
“safe haven” for foreign capital

The trade deficit
continues to grow, dollars pile up, and lose their value

Surging U.S.
productivity (likely a chimera)

The U.S. Stock
Market under-performs relative to other global market leading to a net drain
on capital

Rising budget
deficits financing by bond sales will drive up interest rates and attract
foreign capital (while capitalizing the trade deficit)

The U.S. economy
recovers faster than Europe and/or Asia and import demand increases

 

Higher oil prices
exacerbate trade deficit

 

Japan stops
intervening to devalue the yen.

 

Rising budget
deficits financed by printing money will lead to inflation and a cheaper
currency

 

Macroplay of the Week:
Through the Weak Dollar Prism

The
underlying presumption here is that the negative effects of a rising euro and
yen relative to the dollar will be offset by the more fundamental reality of
strong Japanese and European recoveries. This, then, is a “basket” to play with
a recommended weight of 40% to Japan, 40% to the two European entries and 20% to
the Brazilian short. Then, wean the basket as conditions warrant.

Japan Index Fund

(
EWJ |
Quote |
Chart |
News |
PowerRating)
is the I-share ETF for a weighted basket of Japanese stocks. If you want to bet
on a strong Japanese recovery, this is a relatively low-risk (and longer-term
position) play because it entails no company risk, only “sector” or country
risk. BUT the caution here is that if you believe
the yen will strengthen relative to the dollar, EWJ is at risk because many of
its top holdings like Toyota and Sony will be hurt by a strong yen which
depresses exports. That, then, is your caution. Technical setup is outstanding:
10-, 21- and 50-day moving averages stack nicely above one another and the stock
is under accumulation. United Kingdom Index Fund
(
EWU |
Quote |
Chart |
News |
PowerRating),
the U.K. I-share, and Switzerland Index
(
EWL |
Quote |
Chart |
News |
PowerRating), the
Swiss I-share likewise look good technically (the only ones really among the
European I-shares).

As for
the Brazil Index Fund
(
EWZ |
Quote |
Chart |
News |
PowerRating), this is a short candidate. Brazil is facing increasing political
uncertainty, with a leftist likely to be its next president. Plus, the
devaluation of the Argentina currency will put an end to Brazil’s artificial
currency advantage in the region. Finally, a weak US dollar creates its own
hemispheric pressures from Canada and Mexico down to the land of Mardi Gras and
bossa nova.

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. Â