TRIPLE
THREAT
The Well-Timed Strategy for Week Ending Nov 16
by Peter Navarro, Ph.D.
November 11, 2007
Navarro's Big Economic Picture
The US stock market�s risk-reward calculus now clearly favors the short side. Bearish forces include the following:
The Sub-prime Meltdown/Tranche Breakdown: The housing bubble rise in asset prices was accompanied by a proliferation of Collateralized Debt Obligations (CDOs) which sliced and diced home mortgages into different categories of risk. These CDOs were bought by banks and financial institutions who borrowed at low short term rates to buy the higher yielding CDOs.
Predictably, the highest risk CDOs are now trading at 17 cents on the dollar; and their owners are eating big losses. The big problem however is that even the lowest risk CDO tranches are off 20% or more. As a result, the CDO holders are finding it difficult to find short term debt to continue servicing their long term CDO holdings. They face the prospect of defaulting on what are actually pretty decent investments. A wave of defaults would shake and bake both the bond and stock markets and further squeeze credit. This is a slow motion train wreck.
The Decoupling Debate: As the US economy faces recession and cuts interest rates, the rest of the world � Asia, Latin America, and Europe most prominently � are struggling with the inflationary pressures of more robust growth, can�t cut interest rates, and in many countries, are raising interest rates. This is an unstable equilibrium.
The big question is whether the rest of the world will hum along with Uncle Sam in the tank. The decoupling theory says that countries like China, India, and Brazil are now so robust that domestic consumption will displace the loss of any exports to the US. IF decoupling fails to materialize, we will see a global recession and a spectacular bursting of the Chinese stock market bubble. Nothing to fear there if you know how to be short.
The Dollar Debacle: The incredibly shrinking dollar may still have a long way to go given the vast stores of greenbacks sitting in foreign reserve coffers. A run on the dollar could be triggered by the numerous countries of the Middle East � from the Saudis to the Arab Emirates � abandoning their dollar peg, letting their currencies float, and repricing oil in euros or a basket of currencies. Odds of this happening are getting close to 50-50.
In addition, a run on the dollar could be triggered by China cutting back on the purchase of US bonds and/or, more Draconian, actually dumping some of their vast dollar reserves. Odds of this continue to rise along with trade frictions.
So watch these macro trends very carefully and trade accordingly.
This Week's Big Market Movers
It is a pretty light week on the macroeconomic calendar front. Retail sales on Wednesday may be the most interesting report of the week as it may shed some light on the state of an American consumer squeezed by falling housing prices and rising oil prices. Beyond that, it may be broader macro headlines that move the markets, e.g., oil over $100 a barrel.
Trade of the Week -
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The International Scene - Technical Take
Except for Australia and Brazil � both international commodity and energy plays � all of the ETFs tracked in this column are showing marked technical deterioration. They have gone from a long buy to a long hold but this might be a good time to take some profits off the table.
|
Country or Region |
ETF |
|
|
U.S. |
SPY |
Long |
|
Europe |
EZU |
Long |
|
Europe S&P Eur 350 |
IEV |
Long |
|
- Germany |
EWG |
Long |
|
Emerging Markets* |
EEM |
Long |
|
Asia 50 ADR |
ADRA |
Long |
|
- China 25 |
FXI |
Long |
|
- Japan |
EWJ |
Long |
|
- Australia |
EWA |
Long |
|
- Korea |
EWY |
Long |
|
- India |
IFN |
Long |
|
Latin America |
ILF |
Long |
|
- Brazil |
EWZ |
Long |
|
- Mexico |
EWW |
Long |
|
Gold |
GLD |
Long |
*Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
The Market Edge Market Summary from www.marketedge.com
© 2007 Peter Navarro
“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should and if they are trading on margin, perhaps more than they have.”-- If It’s Raining in Brazil, Buy Starbucks
Peter Navarro is a business professor at the University of California and the author of the best-selling investment book If It's Raining in Brazil, Buy Starbucks and The Well-Timed Strategy. His latest book is The Coming China Wars: Where They Will Be Fought, How They Can Be Won.
Contact Information
Peter Navarro Irvine, California USA | Email | Website | Editorial Archive
