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Just a Bad Day or a Bearish Beginning?

Posted January 20, 2010

Topics: Global Business, Finance & Investing

The stock market finished last Friday on a decidedly bearish note –- big drop on heavy volume. The question for this week is whether this was simply an aberration attributable to an options expiration day or the beginning of some kind of market correction.

If you take both the economic data and the technical condition of the market at face value, then there is nothing to worry about. The upward trend seems firmly in place, and the evidence continues to suggest an expanding economy -- with the latest such evidence being an uptick in the consumer price index in the ongoing steepening of the yield curve.

On the other hand, reputable economists like Mark Zandi and Martin Feldstein are forecasting a double dip recession.  While the slowdown hasn't showed up in the daily yet, these economic bears are looking ahead to an end to help for the mortgage market, continued massive budget deficits, and persistently high unemployment. From that, they tease out a recessionary scenario which would be clearly bearish for the stock market.

Here is where I stand on the debate.  I am in the Zandi-Feldstein skeptical camp. As loyal readers will remember, my skepticism dates back to my "market top" call in mid-October. Since that time, the Standard & Poor's 500 index has tacked on an additional 6% to the 61% gain between the March low and mid-October.
I continue to ponder whether my market top call was simply premature or just plain wrong. Either way, I don't regret the call yet at this point. I'd rather lose 6% on a wrong market top call than give away 10% to 15% quickly in a sharp market correction. That's why, while I made a ton of money like most people between March and September of 2009 in the market, unlike most people, I have grown more and more cautious.

My caution is now reached the point where I prefer cash to even dabbling on the short side. Of course, as I said in an earlier missive, I also only enter stock positions if I have a long-short pair that I want to use as a hedge.

I know this approach won't have a lot of appeal to a lot of investors. However, my philosophy is to make most of your money in the market in the meat of the move when the trend is clearly defined. Although we have a clearly defined trend now, my view is that the meat of the move is already passed us and any further gains, at least over the next few months, are likely to be relatively small -- while the risk of a correction steadily increases. This is the kind of macro trading that is the antithesis of the buy-and-hold investor.

Haiti Buries Huge China News

While a real earthquake hit Haiti last week, a virtual earthquake with far greater implications for the global economy hit American business enterprises in the form of a massive cyber attack by agents of the Chinese government. Please read the op-ed that follows below carefully. It appeared last Friday in the San Francisco Chronicle.

One of the great flaws of the American media is that a tragedy like that of the Haiti earthquake can completely knock a story like the Chinese cyber attack completely off the front pages. I see, however, China's cyber attack on American enterprises as a significant historical event. That's why I would ask you read the op-ed carefully below and then forward that op-ed to anybody you can, including your elected representatives. In my book The Coming China Wars, I describe in detail China's strategy to become the world's greatest military and economic superpower at the expense of countries like America and continents like Europe. It's damn well time for working Americans to become as well versed in the matters of China as they are in NASCAR and NFL football. It's also long past time for our myopic, money-grubbing politicians to wake up and understand that the greatest job program we could adopt right now in Congress would be trade reform.

China's war on the U.S. economy
Peter Navarro,Greg Autry
Friday, January 15, 2010

China's recent cyberattacks against Google and as many as 33 other U.S. corporations open up a dangerous new industrial espionage front in Beijing's war on American business.

China's objective was not that of a rogue hacker -- to create chaos. Rather, the target was any intellectual property that would give Chinese enterprises a competitive edge -- from trade secrets and new technologies to software such as Google's proprietary source code.

Chinese cyberattacks are hardly new. China's military regularly hacks into America's defense networks to acquire military technologies. A glaring case in point: the highly sophisticated penetration last April of the Pentagon's $300 billion Joint Strike Fighter project.

Chinese industrial espionage, along with other illegal means to acquire American business technology, is hardly new either. For example, an American manufacturer such as GM or Intel that produces in China must surrender some of its technology. Such forced technology transfer is clearly illegal under World Trade Organization rules, but U.S. executives meekly kowtow for a piece of the action.

Similarly, on the industrial espionage front, a shadow network of Chinese visitors to American soil regularly troll for new designs, processes, products and software that can be copied or reverse-engineered. The standard joke: What do they call an American patent in China? A blueprint.

More broadly, according to the U.S.-China Economic and Security Review Commission: "China is the most aggressive country conducting espionage against the United States." Of course, once intellectual property is stolen and exported, China gains yet another competitive edge -- even as China's economy booms and America's goes bust.

What's new and alarming about China's latest wave of cyberattacks is the extension of Beijing's flagrant industrial espionage to cyberspace. If the bank accounts, client lists, trade secrets, patented technologies and proprietary software of American corporations are not safe from Chinese hackers, this becomes an issue not only of economic policy but also of national security.

Predictably, Chinese government officials deny any culpability. This is supremely disingenuous, given the tight control of China's Internet by its vast army of cybercops and the sophistication of the attacks.

At the dawn of this new cold cyberwar, President Obama and Secretary of State Hillary Rodham Clinton must be clear: Any attack on America -- from Pentagon hackings and industrial espionage to forced technology transfer and mercantilist weapons like currency manipulation - represents an act of aggression and will not be tolerated.

Peter Navarro is a business professor at UC Irvine and author of "The Coming China Wars." Greg Autry is a UC Irvine graduate student. Contact: www.peternavarro.com.