Gaga Over “Green Shoots”
The Well-Timed Strategy for Week Ending May 1, 2009
by Peter Navarro, Ph.D.
April 27, 2009

Market Pulse

Last week’s Earth Day notwithstanding, “Green Shoots” is not some wheat grass concoction offered up at the health food bar. Rather, it’s the term that seems to have spread like a virus across the financial press to describe some glimmer of hope on the horizon for the global economy.

Upticks in leading indicators like consumer confidence and the ISM index are offered in support of the green shoots hypothesis. The latest stock market rally likewise offers some support for the idea that the worst might be over.

The green shoots gaga notwithstanding, opinion remains split over whether the global economy has begun to improve or, alternatively, is simply seeing the pace of its deterioration slow dramatically. To sort that issue out, it's worth going around the globe and doing a quick check.

The consensus seems to be that China is exhibiting the most robust recovery. Much credit is being given to a massive fiscal stimulus package which was introduced months ago. (I wrote about this fiscal stimulus in a previous newsletter, and what was interesting at the time was how the Chinese were able to implement it even before the US had -- the theme being the "student learns from its master." So far so good, but the one caution on China is whether the government might be cooking the statistical books to hide a situation that may be worse than described in the press.

The consensus also seems to be that Europe is the sick man of the globe. Of the major economies, Great Britain is the most pathetic. What I find so funny about the whole situation, in a darkly comic way, is how a country which is home to both the Economist magazine and the Financial Times -- the two premier financial publications in the world -- can mismanage its economy so thoroughly. Its balance sheet is right out of a Stephen King novel.

As for the United States, the jury has to be still very much out. Yes, the fiscal stimulus is on its way. And yes, the housing market seems to be stabilizing. But one must continue to wonder how a country with double-digit unemployment which continues to worsen can possibly turn itself around in the near-term.

These uncertainties are reflected in the technical characteristics of the stock market. Readers of this newsletter were in on the ground floor of the latest rally, but I did warn last week that the market's inability to decisively zoom past 8000 on the Dow is a big cautionary flag.

My bottom line here is twofold: let's look for some more green shoots in terms of the data and let's see if the Dow can put a couple of solid up days on the board and leave the 8000 level of quasi-resistance behind.

Last take: Last weekend’s newsletter added Bank of America to my buy list. If anybody over the weekend thought it was a good idea to put in a "buy at the market open at the market price" order on B of A, they likely would be in the red right now. (NEVER use buy at the open market orders - trader’s tip)

In fact, Bank of America had a horrible week last week. This week may not be a lot better as a very contentious shareholders meeting is coming up. My rationale for going long Bank of America rests on the tremendous spreads I see mortgage originators capturing in the current mortgage market, and with its acquisition of Countrywide Financial, Bank of America is one of the biggest players in that space. If you want to play that phenomenon, a safer bet is probably Wells Fargo, which doesn't have anywhere near the balance sheet issues of Bank of America. As for Citi, I decided to bail on it, dumping my options, for a very small gain. That said, I do believe “there’s gold in them thar mortgaging hills.”

THE CHINA EFFECT

Please see my latest You Tube report.

© 2009 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