The Big Picture
Investor: Housing Flippers & Drunken Bacchanals

 

Navarro’s Broad
Market Outlook:

            There’s a really
good article in this weeks Barron’s called “Leave Them Low” which explains which
interest rates should stay low.  The key drivers are: (1) A lack of consumption
in Asian countries commensurate with their export prowess, which leads to a HUGE
savings surplus that gets recycled in international markets and keeps rates low,
and (2) A huge buildup of petrodollars in the Middle East and Russia which,
unlike in other eras, is not being wasted on war and an arms buildup.   Toss
into the mix rapid Chinese productivity gains which create huge deflationary
pressures and, at least according to Zhao, there’s no reason for interest rates
to go up.   Of course, the downside in this “equilibrium” is that the U.S. will
continue to effectively trade its assets for imported goods and down the round
this will take its tool on the long term growth path.

            Just some food for
thought as we continue to work our way through the morass….

Aloyan’s Technical
Take: “The Market Has No Clothes!”

The markets
bounced this week, with all three major indices finishing in the green.  The Dow
closed up 57 points (.55%) at 10461, the S&P 500 was up 8 points (.71%) at 1181,
and the Nasdaq was up 15 points (.73%) at 1999.  Resistance is around:
10471, 10600, 10867, and 10984 for the “Dow,” 1192, 1200 area, 1210, 1218, and
1229 for the S&P 500, and 2000 level, 2020, 2072, and 2100 area for the Nasdaq
Composite.  Support is at: 10387, and 10241 for the “Dow,” 1181, 1166,
and 1142 for the S&P 500, 1978, 1950 area, and 1926 for the Nasdaq Composite.  

My sector
breadth indicator was positive, with 65% of the sectors in the green.  The Drug
sector led the strength, while the Internet sector led the weakness.  The dollar
was relatively flat on the week, as it struggles to produce closes over the 85
area on the Dollar Index.  If it does produce 2-3 closes over 85, this could
move the Dollar Index up 2+% very quickly.  Bond yields moved up last week, with
the 10Yr Treasury Yield closing at 4.49%. 

My trend
indicators remain down for the S&P, “Dow”, and the Nasdaq.  My breadth,
momentum, and volume indicators remain “bearish.”  My sentiment and
economic/fundamental indicators continue to support a defensive position.

Hedging Your Bets
With Matt Davio:

Take #1:
It appears we now have oil and housing topping at almost concurrent moments.
Very interesting indeed.   Housing Daytraders (Flippers) are showing up in my
local (small Oregon town) market along with all the national “hot markets”. This
sure reminds me of a time not so long ago in US equity markets. 

Remember
when the music stopped playing in March of 2000, and liquidity dried up and
prices evaporated?  The same thing I do believe will happen in the housing
market. Just when will the music (and hammers) stop, that is the billion dollar
question.

In this
regard, Uncle Al, everyone’s Fed pal, has been the prime mover of the housing
boom with his ultra-easy money policy in the wake of the 2001 recession and 9/11
shock.  Now, we are very late in the Housing/Real Estate party, and I would
contend the drunks are running wild.   My mother always said, “nothing good ever
happens after midnite”, and she is right as usual.  I think with the housing
party, we are around 2 am already.

Take #2:
Volatility is decreasing to near 9-year lows again! Tough for the fast money to
make money under those conditions — so where will it go? 

I’ve got my
eye on the CBOE Nasdaq Market Volatility Index (VXN) which has
just moved below the “death valley” level of 17. By “death valley” for the VXN,
I mean that moves below 17 over the past four months have coincided with the
termination of rallies in the underlying Nasdaq 100 Index (NDX).

Despite
finishing in the green, the market grinded all week and really the bounce we saw
was pathetic and I think we will still see a big whoosh by summertime.  Let’s
get the earnings party started next week and shake the volatility tree.

 

Peter’s Portfolio:
Goodbye to My Beloved WMB

            After watching my
beloved WMB go through a triple top and fail to break $20 three different times
and with oil prices softening, I’ve cashed in my WMB 2006 calls with a nice gain
— but less than I had hoped for.  Plan to reload with 2007 calls at 20 bucks at
some point as I believe this is a $25  to $30 stock.  The risk to reward is
unfavorable now.

            I’ve been reading
Barron’s Technology Week section for over a year, and it is usually a totally
worthless exercise.  Finally, however, one of the columnists made some sense in
suggesting Kodak might be an interesting speculation at this point.  The trigger
would be Dell switching from Lexmark to Kodak for a lot of its printing needs. 
I’ll be watching it.

            My ARDI position is
in the red but still like it.  ZILA is inscrutably well off its high despite
what should be a very bullish outlook.

 

David’s Pick: Cash.

           

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

For investment management services, contact David at
platinum@peternavarro.com.   If
you are interested in hedge fund services, contact Matt at
infinium@peternavarro.com.

 

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

For investment management services, contact David at
platinum@peternavarro.com.   If you are interested in hedge fund services,
contact Matt at infinium@peternavarro.com.

 

To learn how to trade or invest from a big
picture perspective, try Navarro’s book “If It’s Raining in Brazil, Buy
Starbucks” OR his audio course “Big Picture Investing.”  Both are available at
https://barnesandnoble.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.