Why You Should Use This Time For Research

Market Outlook: Bearish

Sector Watch: Tech (-)

David’s Pick: Net short

All three major indices experienced distribution
and finished the week in the red. We enter this week with some big economic
data (Durable Goods, GDP adv., New/Existing Home Sales, Initial Jobless Claims
and Help Wanted Index, Consumer Confidence and Michigan Sentiment, Personal
Income, and more). Couple this with the FOMC meeting and more earnings
and we should see some fast, market-moving action.

As for where that action might go, we noticed on Friday that Kudlow & Cramer
are showing signs of embarrassment as they speak. They are getting very
worried about being discredited (and rightly so) for their bold bullish predictions
of blowout earnings, a “new bull market” and the Dow hitting 10,500
by the end of the year on the back of a strong economic recovery. So far they
have failed on their blowout earnings prediction. Indeed, most of the corporations
that are beating lowered expectations are making it by a penny or so, and on
stagnant revenue growth and guidance going forward.

The biggest problem here is that Wall Street, along with its economists and
analysts, have forecasted perfection in the market and economy, and the Joe
and Jill Plungers of the small investor world are now paying perfect market
prices. They forgot one thing: We are in a current environment that is far from
perfect!

Overcapacity, debt-burdened government and consumers, political and social unrest,
joblessness that has lasted longer than ordinary recessions coupled with jobs
leaving US shores that will never return, rampant labor strikes, inflation in
benefit, energy, and commodity costs, coupled with deflation in pricing power,
sluggish corporate revenue growth outlooks, high stock valuations, extreme bullish
readings in the major sentiment readings, negative divergences in momentum and
volume indicators vs. price action, wild market speculation on speculative
stocks with no earnings and poor balance sheets which are outperforming “real”
companies, a refinancing boom coming to a halt which has contributed to most
of the GDP growth and the increasing money supply, a recent trend towards contraction
in said money supply, virtually nonexistent corporate capital expenditures both
now and going into 2004, and there’s much, much, more…!

On the home sales front, the sector is getting a second wind from the softening
of yields. Once folks figure out that that is a sign of a weakening stock market
and a not-so-robust economy, the second wind will be spent. Note also that mortgage
apps are running at about one third of their May high. At some point,
that’s got to translate into lower housing starts.

On the FOMC front, the fed is between a rock and a hard place. It knows
the job picture still is poor but any effort to further cut rates would undermine
the (false) optimism about the recovery. Watch this tightrope act.

GDP is being fueled artificially by heavy defense spending. That can’t
go on. Will we have one more surge up in the 6% rate of growth area or has it
already started to subside? This could be a shocker either way.

The modest recovery in consumer confidence is being driven by current expectations
improving — not expectations about the future. Until that part of
the equation improves, questions will remain about the long-term strength of
consumers in this recovery.

Peter’s Pick: Cash is King

Use this time to do your research. Line up your next long positions for
after the fall. If you live life on the edge, maybe you will short the
Cubes. Or e-Bay
(
EBAY |
Quote |
Chart |
News |
PowerRating). Or
(
SINA |
Quote |
Chart |
News |
PowerRating). Or….
You get the picture.

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.