BULLISH REVERSAL HOLDING
The Well-Timed Strategy for Week Ending August 31, 2007
by Peter Navarro, Ph.D.
August 27, 2007

Navarro's Big Economic Picture
It's All About September Now

A mid-August bullish reversal appears to be holding as the markets have rebounded somewhat.  However, look for the markets to slouch into Labor Day on low volume as the Wall Street crowd heads out to the Hamptons. In the meantime, there is much to ponder.

One question is when will the housing sector find a bottom?  One of my favorite analysts Mark Zandi on CNBC says it won’t be until 2009 – a very bearish appraisal indeed.  What’s interesting here is the next wave of problems in real estate may be with condo projects as there is no growing evidence of foreclosures and bankruptcies.  In addition, strapped homeowners likewise appear to be tapping into their credit card lines of credit to stave off their own foreclosures.  

As for what looms in September, the big question all the talking heads will be pondering over the next few weeks is whether the Fed will cut interest rates on Sept. 18^th.  Absent some much stronger evidence of a rejuvenated economy than we got last week, methinks the cut is a done deal.  Howeer,, it’s a bit pathetic for Wall Street to hang the entire market trend on the decision of one central bank.  In fact, it is far more likely that the market trend over the next several months will be influenced far more by events such as whether rising inflation is contained in China, whether Europe really is going back into a slump, and if other countries such as Brazil and Australia start to show their own signs of a slowdown.

Remember: We are in a new paradigm here in which the US is no longer the locomotive – nor the caboose.  The big engine driving the markets is the integrated global economy.

Last take: The Russians cut oil supplies to Germany by a third last week as a way of pressuring Germany to give Russia a stake in German refineries.  This is brass knuckles stuff and does not portend well for a peaceful and prosperous Europe.

This Week's Market Movers

There will be a few reports of some interest this week but not a lot of people around to watch their findings.   Monday is existing home sales.   Tuesday and Friday we get consumer confidence and sentiment respectively, and these are my top picks for market movers as both are likely to fall.  The other report of note will be a revision to Q2 GDP which everyone expects to jump up above 4% -- quite a healthy rate.  The problem is that few people expect this rate to hold….

Trade of the Week: Short Europe (IEV), Short China Soon (FXI)

The European recovery is clearly stalling and IEV, the iShare for 350 big European firms, is setting up nicely for a short.

In addition, for your watch list, there was an interesting article in the WSJ about how hard it is to short the China market but one suggestion was to go short the iShare  FXI, which tracks 25 large China companies.   I see this as a “dip your toe in the water” type of short that I used for months on months to try shorting the housing sector.  (I used Centex as my short target and got burned repeatedly as it continued its rise but eventually, the top was put in.)   In this case, it’s clear that at some point China stocks are going to take a beating.  As for FXI, it’s at the top of its range and undergoing some technical deterioration.  Be careful here but this is a good one to watch.

The China Effect

The China Effect is a video YouTube presentation that provides a weekly analysis of the major news events coming out of China as they affect world markets.   This week’s China Effect installment discusses nukes in China, the possibility of Chinese investors being allowed to invest abroad, the effect of toxic Chinese PJs on Xmas sales and more.  GO TO YOUTUBE.

And by the way, thanks for all the useful comments about this feature.  Most folks preferred the video version.  For those of you who prefer the text version, I will try to post regularly on the Daily Blog on this subject.

The International Scene - Technical Take

The global recovery remains in a funk, at least as diagnosed by investor bets on world markets..

*Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

© 2007 Peter Navarro
www.peternavarro.com
Editorial Archive

“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

The Market Edge Market Summary from www.marketedge.com 

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
Email  |  Website

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.