Why A Pullback Is In The Cards

  • July 7, 2003
  • Peter Navarro

Market Trend: Oscillation Point

Market Outlook: Cloudy With a Chance of Pullback

Peter’s Pick: India Rising

The Broad Market Outlook: Cloudy With
A Chance of Pullback

Last week, the market
continued its curious and curiouser pattern of sloughing off bad economic news.
Both the ISM and jobs reports were flat out ugly — although that didn’t stop the
pundits from coming up with a variety of reasons why the reports weren’t as bad
as they seemed.

At this point, the Wall
Street consensus seems to be that there’s enough fiscal and monetary stimulus in
the pipeline and enough signs of a revival to suggest a solid economic recovery
— we just can’t quite see it yet. So…let’s go ahead and buy stocks in
anticipation of the party to come.

This may yet turn out to be true. And there may be other reasons why the stock
market is doing so well. For one thing, money that was flowing into the housing
sector will soon ratchet down as housing prices are richly over-valued. Plus,
the tidal wave of funds that has been pushing up bond prices and pushing down
yields has developed a backwash as that market seems overvalued as well. And who
has the patience to leave money in a money-market account yielding a negative
real return. So…let’s go ahead and buy stocks.

All well and good
perhaps. But it still looks and feels to us like economic growth is sluggish at
best; that our manufacturing base is circling around the Chinese drain; that the
world’s sixth-largest economy (California) is on the verge of a budgetary
collapse that will surely offset at least some of the fiscal stimulus; that the
European economy (particularly Germany) is stagnant; that with the Chinese
currency pegged to the weakening dollar the other countries of Asia must at some
point start a devaluation war; and that …(fill in your own blank).

On top of all this,
we’ve got pundits now saying either: (a) we will soon get a pullback, or (b) the
market may rally this summer and then we will get a pullback. Either way, a
pullback is in the cards so if enough people believe that, we should get the
pullback forthwith.

The bottom line: With
each notch up the market indices, it becomes more and more risky to enter the
market long.

The Week’s Macro Data Market Movers:

The
Macroeconomic Calendar


DAY


EVENT
Monday

 
Tuesday

  • Germany jobs report and industrial
    production

  • Chain store sales snapshot

  • Consumer Credit

  • Richmond Fed Manufacturing
Wednesday

  • MBA Mortgage Applications

  • Wholesale trade
Thursday

  • Jobless claims
Friday

  • Trade report

  • PPI


* Potential major market movers in red

It’s pretty much a
nothing week on the macro data front. Our pick of the week for a market mover
is the trade report. At least part of the bullish scenario is predicated on a
weak dollar stimulating exports. The problem is that the dollar is only really
weakening relative to Europe, which is too weak to buy our goods. So we will be
looking closely for any sign of an uptick in exports, do not expect to see it,
and will view that as bearish. Related to this will be Tuesday’s data on the
German economic front. We see nothing but bread and beer lines, which means
Europe won’t be eating any cake soon.

The weekly jobless
claims on Thursday will continue to draw much scrutiny until they fall below
400,000. 

Final take: We still
wait with bated breath for a drop off in mortgage apps. If the yield curve
really is steepening, this has to happen so that the housing sector dies, in
either a recovery or stagnation scenario.


Peter’s Pick: India
Rising

While China is the
unchallenged leader in the “kick butt” department, India has lagged far behind
it and just about every other Asian country.   View it now, however, as a Warren
Buffett value play as it seems under-valued by the market.

What I like best
about India as an investment is its positioning as the number one global
outsource source. If and when IT spending truly picks up again, India will be a
huge beneficiary as it now is providing a huge array of IT services to American
tech companies on an outsourcing basis.  Fundamentally, India’s biggest strength
is its large cash reserves to back its currency — with a strong currency
encouraging foreign investors who might otherwise fear devaluation.  

So how do you play the
Indian card? I’d stay away from trendy India stocks like Infosys and Dr.
Reddy. Instead, choose one of two India funds that trade like stocks —
(
IFN |
Quote |
Chart |
News |
PowerRating) or
(
IIF |
Quote |
Chart |
News |
PowerRating). BOTH SUFFER FROM LIQUIDITY PROBLEMS, trading at least than 100,000
shares. 

Of the two, I found it
easier to find info on IFN. If any readers have some insights, send me an
e-mail. The charts below indicate each has already had a good run and that both
are highly correlated.

 



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