Fin - Breakout - US

Week in Review: China, Big Tech and a Sideways Market

Jeff Macke
Breakout

Another week and another.... Well, to be candid, it's almost impossible to summarize in one word a market that has been aggressively sideways since February. That being the case, who better for Breakout to talk to than Vitaliy Katsenelson, a professional investor and author of The Little Book of Sideways Markets?

With the uncharacteristically emotional commodity trading finally starting to setting in terms of volatility, albeit in a downward direction, we asked the worldly Katsenelson what on earth was happening. He was quick to offer the idea that it's impossible to understand commodities without considering China, which he thinks is the biggest bubble "of this century" (an oddly strong statement considering we're only 11 years in). Katseneson says China is consuming an enormous amount of resources building "ghost towns," a problem the native of Soviet Russia attributes to central planning.

To Vitaliy, Chinese inflation data just may be the prick that eventually pops the China bubble. For others, commodity volatility is a function of the dollar, which continued to move higher this week, particularly vs. the euro. The greenback's gains may seem glacial to those more accustomed to NASDAQ lunacy, but a 5 percent two-week move is aggressive in the stately world of currency.

Of course, the commodities could just be trickling down from silver, which merely moved in a 17-odd percent range this week before closing down just over 5 percent on the week. This seems a good place to note that the specific causes of market moves are generally conjecture, rather than objective fact. Bubble, CME, dollar, conspiracy or just mania; all have some validity in explaining the past couple of weeks in the world of metals.

Storing this week's commodities warehouse of confusion, we move to Cisco (CSCO). The company reported their quarterly disappointment this week. CEO John Chambers pleaded his case for the turnaround he outlined last month. The juggernaut has already shuttered its profitable but strategically doomed Flip camera division, an acquisition Cisco paid a cool half a billion for fairly recently. Katsenelson says Cisco deserves a look. The stock has been dead, he says, as a function of the Internet bubble hangover, not because of long-term failure. Earnings have grown enormously, the company has more cash than a Miami drug lord and the widely loathed Chambers is at least saying the right things about a turnaround. Katsenleson is willing to wait.

While they may look alike on the surface, Katsenleson draws a contrast between Cisco and Microsoft (MSFT). The difference, he says, is leadership. While Cisco and Chambers are fostering a culture of admitting mistakes and moving on, Microsoft seems to be under the impression they've been flawless. While I'd take some exception to that, it's hard to spin the fact that Microsoft ditched their tablet PC after being the first to demonstrate a prototype in 2000.

Katsenelson is long both Microsoft and Cisco, the difference being that he thinks Chambers has the latter on the right track while Steve Ballmer on the first train out of Redmond.

Oh, yeah, stocks. Why would I bury what should be the lead of a stock-centric week in review? Because after five days of hand-wringing and earnings and bubbles popping and trying to re-inflate, the S&P 500 finished within a viscous loogie of flat for the week. Purple Crayon enthusiasts will note that 1,340 was tested and held. As long as that's the case, it's going to be a low percentage bet to lean too far to the long or short side from where I'm sitting (as always, in flowing robes atop Mt. Judgment).

Add it up and what does it mean? The jury in this case remains out, at least until next week.

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