Stock Market Remains in a Correction
Stock-Markets / Stock Index Trading Feb 21, 2010 - 02:13 PM GMTThe market action in the United States from last week provided some small encouragement that the stock market may be finding a new floor. That said, there remains significant cross currents buffeting this market which suggests continued caution.
On the bullish front, it is abundantly clear that the business investment driver in the GDP equation is hitting on all cylinders. The ISM Manufacturing Index continues to trend strongly upward and the ECRI Weekly Leading Index projects continued expansion. Meanwhile, the yield curve spread continues to show a steepening yield curve, which typically points to expansion. These are signs of recovery that should not be ignored by anyone.
That said, on the bearish front, there continue to be problems both in the three major other elements of the GDP growth equation as well as with issues beyond the United States border.
For example, consumer confidence remains in a sideways pattern and is anything but bullish while the housing market remains in a funk. This is important because one of the biggest question marks for long-term recovery is whether or not the consumer will step in and buy all of the inventory that businesses are now piling onto the shelves. And don't forget, unemployment hovers around 10% while the actual rate of unemployment is probably closer to 15% or higher. That's less wages and less purchasing power and less growth.
In the government element of the GDP equation, we are seeing a massive expansion of the government sector. While this may be bullish in the very short run, the rapidly rising debt burden will soon put upward pressure on long-term interest rates and likely crowd out business investment and hammer hard on me mortgage and housing markets.
Meanwhile, at the state government spending level, states like California and Ohio are facing insolvency. The likely result will be more government layoffs, reduced expenditures, and/or higher taxes. Regardless of your ideological orientation, it should be clear that the overall impact of the state budget crises will be contractionary.
Finally, the Greek tragedy in Europe, which is causing the euro to fall relative to the dollar, can only hurt US exports to Europe -- with exports being one of the few bright spots over the last several years in the US growth story.
As for Europe, the prediction I have made is that the euro is not dead. However, the growth of the euro beyond 16 countries in the European monetary zone is as dead as it can possibly be. Indeed, there is a high probability that within 12 to 24 months, Greece will bailout of the euro and readopt the Drachma. The reason: it will be a lot less painless for the Greek economy to recover by selling more exports to its neighbors than by going on an austerity kick to please Greece's German Masters.
Finally, finally, there is the big bad Chinese menace. China is desperately trying to control inflationary pressures in its economy, and if it contracts too sharply, that will send a contractionary ripple effect across Asia which will eventually hit US shores.
On top of this, the Chinese government is increasingly revealing its dark side to the world with its bullying and its threats to the United States over everything from Taiwan to Tibet and the Dalai Lama. My own theory here is that Chinese are doing this not out of passion but rather strategy. It is a way of misdirecting attention away from the number one issue between the US and China, which is China's currency manipulation. At any rate, at some point I hope the American people and the American government wake up to the fact that the greatest country in the world should not be in a position where a totalitarian dictatorship can bully us.
My bottom line this week is this: there are many months in any given year where the stock market trend is clearly defined and you can go either short or long with great confidence and thereby be an intelligent speculator. These last few months have not been such a time. While last week's market action provided some glimmer of hope that the market might resume its upward trend, I continue to hold most of my portfolio in cash amidst a sideways pattern in the market.
My one big macro bet remains CYB, which is a bet that the yuan will appreciate against the dollar over the next year. I like this that because there's virtually no downside risk -- that is, there is no scenario where the yuan depreciates against the dollar. I also continue to hold a portion of my portfolio in small-cap biotech stocks like PBTH, CHTP, HALO, and DUSA.
Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.
© 2010 Copyright Peter Navarro - All Rights Reserved
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