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WILL THE LATEST RALLY TAKE ROOT? The Markets Two weeks ago, I wrote in this column: “If you are a short seller, the oil market will undergo a cyclical downturn soon. “ Well, last week, we got that downturn, and it helped provide the U.S. markets with a nice rally. The question, of course, is whether this rally is just another dead cat bounce or one that is likely to have legs. To answer that question, it is useful to review our history. For much of the year, I offered up three scenarios. One scenario described a world in which a U.S. recession dragged down the global economy (U.S. as locomotive). The second “decoupling” scenario had Asia and Latin America prospering and Europe ok as the U.S. fell into decline. The “stagflation” scenario is self-evident. Eventually stagflation has won as decoupling has gone by the boards. The question is whether the stagflation will morph into a more benign global recession amenable to monetary and fiscal policies or whether it will be persistent. If the stagflation proves to be persistent, last week’s rally will be short-lived. On the other hand, if the downshift in the global economy now taking place does moderate both food and fuel prices along with wage demands, that will set the world up for the standard, classic recovery. In such a world, financial markets will anticipate a Keynesian-type recovery driven by policy and off we will go again. It is this, then, that macrotraders need to keep an eye on over the next six months. As this fundamental story unfolds, trading should be dominated by more technical considerations. At this point, all three major U.S. indices are technically shorts, not long. Thus, jumping back into the market on last week’s action would be an attempt to hit a bottom. So if you are so inclined, you may consider waiting another week to see how the technicals further develop. In the meantime, if you must trade, consider my “dollar cost averaging” strategy for the financial sector. Several weeks ago, I suggested that buying small bites of Wachovia or Fifth Third and then adding to the position as it went down dollar cost averaging could be a relatively painless way to find the financial sector bottom. I like this strategy and would add Washington Mutual to the mix and be a little careful with Wachovia, as Fifth Third is behaving much better. Bon chance! Presidential Politics Here’s a question for you: What is the only presidential election since the Great Depression that was determined by the choice of a Vice President? What were the two particular qualities of the presidential candidate that needed shoring up by the Vice President’s qualities? Oh, think a little bit longer than that about answering the question. I raise it because this particular election will likewise be heavily influenced by the VP choice, at least on the Democratic side. That election in question was JFK in 1960. Like Obama, JFK was young and relatively inexperienced (although far more experienced than Obama). LBJ provided the necessary gravitas and also carried Texas and JFK eked out a very narrow victory over Tricky Dick. So who should Obama choose? Obama’s “short list” continues to shrink in a way unlikely to cast a positive light on Obama. The problem here is that really qualified people keep bailing from the ticket. It started with John Edwards. Jim Webb, Mark Warner, and Ted Strickland joined the list and now Gore has likewise demurred. Possibilities left include Sen. Evan Bayh of Indiana, former Senator Sam Nunn of Georgia, and Rhode Island Senator Jack Reed – a West Pointer. In addition, there are Governors Kathleen Sebelius of Kansas and Timothy M. Kaine of Virginia – both in Red States that could come into play with their choice. Two other possibilities include Joe Biden and Chris Dodd – but neither distinguished themselves running for President and Biden, who would likely be a very good VP, has too loose a tongue on the campaign trail for Obama to trust. Finally, Hillary waits in the wings. My lottery pick at this point would be Evan Bayh. I appeared at a U.S. China Committee hearing that he showed up at and after listening to him, I was so sure he was a Republican that I accidentally identified him as such on a CNBC segment. I mention this because the guy is absolutely polished and would be an interesting attack piece right in McCain’s Independent sweet spot. As for Hillary, I continue to believe she would be the best choice because of the dream ticket dynamics and his superior stature relative to all of the other possible candidates but in saying so, I’m just inviting some more hate mail. (Bring it on.) Quick Takes
THE CHINA EFFECT Please see my latest You Tube report.
“Any trader or investor who ignores the power of macroeconomics over the world’s The Market Edge Market Summary from www.marketedge.com
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INFORMATION 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. |
