Navarro's Market Rap

Last week, I indicated that an up week was pivotal if there was to be a full-blown Xmas rally.  Well, up the markets went on the wings of, most of all, one of the most robust productivity reports we've had in a long time (albeit possibly distorted by the impact of the hurricanes on hours worked).

Rising productivity is essential to controlling inflation and along with the productivity numbers came a fall in unit labor costs of 0.5%.   With the jobs report on Friday coming out under the consensus number, this was a good week for quelling at least some concerns about inflation.

Still, all along the yield curve watchtower, interest rates are rising, with all maturities hitting a year-to-date high last week.   While stock market bulls are happy with the asset reallocations that will follow and help buoy the stock market, bond investors are worried about an emerging bear market in bonds.

Next week, with little data to parse, the stock market will either digest its gains or try to power past what has been the upper bound of its trading range for a long time.  Either way, the risk-to-reward no longer favors the short side, and Santa is visible on the horizon.

The Week Ahead: What's a Deficit to Do?
Not a lot of big reports out this coming week.  My favorite for a possible market mover is the trade report on Thursday.  Any sign of a narrowing trade balance would be very bullish, and vice versa. Look, too, on Thursday for any bounceback of consumer sentiment to give the market a boost.

Peter's Portfolio: Shorts and Longs
Still short the QQQQs, I've added longs in some new positions to build a hedge to see if this rally is for real.   QQQQ closed at $40.08, which is very near to its 52-week high of $40.68.  If it powers through, I'll close up and take my small lumps.

New positions on purely technical considerations include: Airspan (AIRN), a broadband wireless play; Amkor Tech (AMKR), a semiconductor packaging and testing company; and an old friend Viisage (VISG), which is a biometric ID company and a post-9/11 play.

ARDI, ASTM, LVLT, CPTCQ, and ARTX represent buy and hold companies.   Technical play DSS is slowly building steam while I'm close to cutting and running on PHMD as the air leaks out of its ballo0n.

Lastly, I'm running up the white flag on Chiron (CHIR).  It's lesson 37 in how to lose on options.  Novartis came in with a new bid at $45 a share, which is exactly the strike price on my 2007 options.  Chiron accepted and I'm out of the money!!!!!!!!!!   So close yet so far.   Live and learn….

Hedging Your Bets With Matt Davio

Bull Within the Bear
Today I wanted to draw an analogy in order to emphasize my point. Years ago, researchers conducted a set of lab experiments in which mice were daily given a discrete choice between cocaine and food. If the mice pressed Bar A, they got food pellets for the day and if they pressed Bar B, they got cocaine-infused water for the day.

Over time, these hedonic rodents repeatedly binged on the cocaine and actually slowly starved themselves to death by choosing to feed their addiction over sustenance. In today's world, the mortgage brokers are the cocaine dealers and the interest-only ARMs are the crack and a sure sign (considering its nearly universal usage) that the addiction to spending is an epidemic. But, moving away from my analogy, it gets worse in the real world.

Nearly every measure of consumer spending that I analyze suggests the debt-laden consumer, dependent on asset appreciation vs. old-fashioned wage and income growth, is extended beyond any time in modern economic history. (In terms of financing the binge, the consumer spends and buys homes funded by Central Banks from lands far away (particularly of a Chinese-kind) -- a slippery slope in which so much can go wrong).

I will not even attempt to regurgitate all the figures I have referred to over the last year (the record level of household debt as a percentage of GDP, the historically low level of home equity as a percentage of home values, etc.). And, as I have discussed innumerable times, the absence of personal savings exacerbates the consumer's plight, which, facing a possible drop in housing prices, will inevitably retrench (not for a month but for a protracted period of time) particularly as interest rates rise (and ARMS are reset higher) and inflation eats further into stagnating disposable incomes.

I recognize that it is quite possible that the consumer will refuse to end its habitualized rabid spending behavior until he has completely exhausted his capacity to do so. To be sure, October's retail sales reports were fine, but I see the end of the line and would not automatically extrapolate the month.

Is October the last hurrah? -- I am not certain. As the Fed continues to tighten and as inflationary pressures build, the consumer could very well partake in one final binge (similar to the experience during Christmas, 2000), which we hereby dub "the great Christmas crack-induced consumer nirvana of aught five."

Nevertheless, the consumer in America today is similar to the mice who forfeit their lives for the repeated fix in the aforementioned lab experiment. These are consumers, who, I am convinced, will be unable to stop spending until they have literally exhausted all means to continue.

Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at peter@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com.

DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.