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Profit-taking Pause or Bearish Reversal

By  May 21, 2009

Topics: Politics, Finance & Investing

Last week’s market decline must raise the question: Was that simply a healthy pullback on some profit-taking in an otherwise newly established bull market OR a nasty harbinger of bearish things to come?

The analytical driver of this column is that the stock market is a leading indicator of the business cycle.  Under that assumption, the decline looks more like a healthy temporary pullback.  Despite some bad news on retail sales last week, there remains mounting evidence that economic recovery is proceeding apace around the globe and that the “green shoots” will grow sufficiently as to end the recession by the end of the year.
That said, this column also sees the current bullish uptrend as a cyclical bull romping naively in a secular bear market.  It is just a matter of time before the U.S. economy is crushed beneath the weight of its own budget and trade deficits.
The fact remains that the Obama-Bernanke-Geithner-Summers continues to lead us down a path that is as political expedient as it is economically destructive (for you Lefties, be assured that Bush was as bad or worse).  So the only question is when will the secular bear snuff out this latest cyclical bull -- sooner or later?  It is because of this question that bad weeks like last week make investors so rightfully nervous.
Given this perspective, it is critical to keep one eye on the market technicals and the other on the economic fundamentals.  I’m still cautiously long GE, Dupont, B of A, and Delta while my long on Intel is testing my patience.  (I also am holding my usual gaggle of high risk biotechs.)  But I’m ready to fold’em if we break below 8,000 on the Dow.
Below, you will find two bonus items in the newsletter this week in the form of opeds on completely unrelated subjects.  The first is GM’s wacky (or Machiavellian) proposal to build cars in China and export them to the U.S. using some of the taxpayer’s bailout money.  The second oped argues that California poses a very serious threat to the national economic recovery -- watch the results of this week’s California ballot measure carefully!
Selling Coal to Newcastle and GM Cars to Detroit (Click here for CNBC segment2 on this)
General Motor’s announcement that it plans to manufacture cars in China for export to the U.S. as part of its recovery plan must rank as one of the most provocative and absurd corporate decisions in this oppressive season of massive corporate bailouts.
Indeed, it is the high of absurdity for U.S. taxpayers to shell out $16 billion in bailout money (and counting) to GM so the company can outsource jobs to China rather than employ Americans in Detroit.  The only rational explanation for such an “in your face” proposal is that we are being “Fritzed.”
In particular, this cars from China proposal may merely be a cynical bargaining ploy by GM CEO Fritz Henderson to wring more concessions out of the UAW.   If this is so, Fritz ought to be run out on a jackass from Detroit -- he doesn’t even warrant a car ride -- and inducted right into the international CEO Hall of Shame.
If, however, Fritz and GM are serious, this proposal is just plain stupid from a U.S. policy point of view.  Under current anything but free trade rules with China, GM could export its Chinese-made cars to the U.S.   However, any cars that GM made in the U.S. would be very difficult to export to the Chinese market.
It’s not just that China slaps a heavy 25% tariff on American cars imported into China.  As part of its Great Wall of Protectionism, China also imposes stiff domestic content rules so that at least some of the U.S. “imports” into China must contain Chinese auto parts.
On top of these protectionist barriers, China won’t even let a foreign carmaker like GM sell into its market unless it first sets up a local partnership and “voluntarily” turns over some of its technology.  However, such implicit forced technology transfer not only grossly violates free trade rules established by the World Trade Organization.  The transfer of such technology effectively dooms foreign automakers like GM to playing subservient role to China over the longer term as China combines U.S. technology with its vaunted cheap labor force..
Beyond these questions of taxpayer subsidies for outsourcing and Chinese protectionism, there are several broader issues.  One such issue is the safety of Chinese-made vehicles -- or lack thereof.
To date, China’s track record on safety is an abysmal one.  Thus far, American consumers have been subjected to lead-filled toys, pet food laced with melamine, toothpaste laced with antifreeze, Viagra dosed with strychnine, dry wall emitting gases more dangerous than coal dust, and a whole cornucopia of rancid food.
In addition, Chinese cars have routinely failed crash tests.  On top of this, Chinese cars are prone to be riddled with counterfeit parts ranging from brake pads and suspensions to windshields and spark plugs.  If these counterfeit parts don’t kill you by causing a crash, they can violate your warranty.
Finally, there arises the issue as to why car manufacturing is gravitating to China.  The conventional wisdom is that its cheap labor that gives China its edge.
In truth, much of China’s competitive edge comes from anti-competitive practices ranging from currency manipulation and massive export subsidies to the aforementioned protectionist barriers.  In addition, Chinese counterfeiting and forced technology transfer together save Chinese companies tens of millions of dollars in research and development expenditures and thereby convey an additional advantage.  If Chinese companies didn’t enjoy these unfair advantages -- all of which are gross violations of free trade -- Detroit and the American Midwest would be far more competitive and prosperous than it currently is.
Peter Navarro is a business professor at the University of California-Irvine, a CNBC contributor, and author of The Coming China Wars. ( www.peternavarro.com)

California’s Budgetary Car is About to Drive Off a Cliff
This time the wolf will really be here -- if California voters fail to approve all four measures on May 19’s special ballot.  The major problem now is that there are no really credible politicians or political organizations to deliver that critical message to a rightfully cynical and jaded public.  Hence, all of the measures are lagging badly in the polls.
To be clear, the wolf we should all fear is the transformation of California’s already severe recession into a bona fide depression.  Put simply, a failure to pass these ballot measures will result in widespread government layoffs and a dramatic cutback in government expenditures -- including deep cuts in education, police and fire protection, prisons, and other essential services. 
In the political gridlock and chaos that is likely to ensue, the combined effect will be a severe shock to an economy already reeling.  That the state already has one of the highest unemployment rates in the country should not be lost on any voter entering the polls next Tuesday.
Any such economic meltdown will likely not be confined to California’s borders.  With the California economy constituting close to 15% of the nation’s GDP, a strong contractionary shock within the Golden State would ripple first through the West and eventually across the nation.  With the current economy recovery hanging by a thread, California’s fall could, in turn, trigger the dreaded “double dip” recession nationally -- just when the country and its financial markets were beginning to breathe a collective sigh of bullish relief.
In fact, we’ve already seen how a faltering California economy can help take down the country.  The current national recession was largely triggered by a housing market collapse that had a major source of origination in California.
That this message is not credible to the general public may be laid directly on the doorsteps of politicians across the ideological spectrum.   At the top of this sad and sorry list is a governor who has become a caricature of his own persona.  While Schwarzenegger is still generally liked, he is increasingly simply not believed and all too easily mocked.
As for the California legislature, there is not a single individual in either chamber of government that has not been tainted by the collective failures of the institution.  To the general public, California’s senators and assembly members to a man and a woman represent a gaggle of squabbling and squawking Lilliputians more concerned with their own advancement up the political ladder than the welfare of the state. 
A similar lack of credibility exists among many of the organizations that voters used to trust.  At the top of this list are the now largely discredited police and fire unions.  After using their badges of honor for years to grub for hefty pay raises and fat pensions at the expense of other public employees and the goal of fiscal responsibility, few voters are now swayed by their endorsements.
The tragedy of all of this is that only the richest and most insulated few in this state will go unscathed if these ballot measures fail to pass.  School classrooms will be slammed shut.  Local governments will be stripped of funds.  Deep cuts in police protection will collide with rising crime in a deteriorating economy.  Fire fighting budgets will be slashed in a state that would keep Nero fiddling round the clock.  And taxes will eventually have to spike to pay for all the mayhem that likely will ensue.
That this profound message can be so lost on an electorate that has become so angry, numb, or skeptical suggests a much broader failure of our entire democratic system in the state. 
Peter Navarro is a professor at the Paul Merage School of Business, University of California-Irvine.  www.peternavarro.com


Nov 2007 -- Called for a move to cash.  Hit very close to top and maintained cash position for over a year as market fell by more than 40%.
Feb 12, 2009: With Dow just below 8000 (7,932), called for the Dow to head down to as low as 6000.  By March 9, it closed at a low of 6,443
March 10, 2009: When market hit 6,500ish, I Issued a buy for GE at 8 bucks and Dupont at $16.50.  GE is now near $14 and Dupont is at $28 for gains of 75% and 70%, respectively.
Other stocks or ETFs I indicated early April that might be good longs: Delta Airlines, Bank of America, Intel, and QQQQ.