Navarro’s Big Economic Picture

We enter the historically best month for the stock markets looking at an increasingly bullish scenario. Yes, the economy is slowing, but business investment and activity appears to be holding strong. Yes, there is inflation, but more and more voices are suggesting that the worst of the inflationary pressures are over. Yes, there is a rapidly declining housing market, but with inflationary pressures moderating, interest rates on the long end are falling. This could revive somewhat the refinancing market and thus help fuel consumption. Lower interest rates could also help the housing market find if not a bottom than a much softer landing.

The other major trend which continues to weigh heavily on my mind is the issue as to whether are not we are in the midst of a historically significant decoupling of the U.S. economy from the U.S. stock market. Historically, the stock and bond markets have both been reasonably reliable leading indicators of economic activity. To the extent, our manufacturing base has migrated abroad and U.S. corporations are becoming increasingly global entities, what may matter more is the state of global economic conditions. For example, even if the U.S. economy slows, if Asia and India and Latin America keep cranking, there’s plenty of earnings to be had for U.S. companies -- and therefore a possibility that their stock price performance may not reflect U.S. economic conditions.

All of this said, while I enter October in a bullish frame of mind, I also am wary of a possible correction in the months ahead that may well be the major one we have thus far avoided

This Week’s Market Movers

There’s mucho data this week and therefore a lot of candidates for to top market movers. The ISM index on Monday and factory orders on Wednesday will give us a nice read on the supply side of the economy. Auto sales will be of interest on the demand side. But the big market mover is likely to be the monthly jobs report. Lower than expected job creation will be perversely bullish as it will reinforce the declining inflation scenario and conversely. Place your bets.

Portfolio Shorts and Longs

My stock of the week is Star Scientific (STSI | Quote | Chart | News | PowerRating). According to Market Edge, “Develops and licenses technology for the curing of tobacco so as to substantially prevent formation of carcinogenic toxins present in tobacco and tobacco smoke, mainly tobacco-specific nitrosamines. It also makes very low-nitrosamine smokeless tobacco pro ducts and discount cigarette brands.” The technicals are strong. Bon Chance. Two other penny picks -- (HTI | Quote | Chart | News | PowerRating) and (INSM | Quote | Chart | News | PowerRating) -- continue to base nice with risk/reward favoring the upside.

Peter Navarro is a business professor at the University of California and the author of the best-selling investment book “If It’s Raining in Brazil, Buy Starbucks” and the business shelf bestseller The Well-Timed Strategy.” His latest book is “The Coming China Wars.”