The Dollar, The Short-Term Outlook

Posted by Ray on August 17, 2009 under Main | Be the First to Comment

I have been very bearish of the dollar for some time and on a long-term perspective that remains true, but short-term is a different story. This last rally we had was more a function of a weakening US dollar and a drastically oversold environment rather than a function of real economic recovery. Contrary to popular belief the market does not represent the state of the economy.

In fact, it is a very poor indicator of economic conditions. As the talk about a new bull market and the economy has ‘recovered’ ensued over the past month it was primarily based on ‘less bad’ information. While people were trying to make you feel better about the real situation they forgot to examine the fundamentals or other reasons for equities to rise. In this case it was purely a fact of a few things that no one, for whatever reason, really looked at. The reasons are as follows:

1. A very weak dollar which eroded your real rate of return in the S&P or Dow.
2. Improved economic data, but by no means was the data as good as the market let on.
3. Drastically oversold situation heading into March where the markets were just decimated.
4. Asia’s economy does have decent signs of recovery, so that makes many assume we are recovering at the same rate which was false.

Since my call on August 7^th when we had strength in the dollar, the markets and commodities did not get crushed was indeed the top in the short-term. As the dollar continued its climb equities have declined, but the rise in the dollar is happening for a specific reason, a flight to quality. The likes of Goldman Sachs, Morgan Stanley, etc. knew that the conditions in equities were overbought in July and that there are still major fundamental problems within the banking system, hence the 77 closed banks so far this year.

When I put it together 2 weeks ago it was clear as day for me to see that as you were buying equities Goldman & Co. were selling and buying the dollar. I, obviously, cannot be 100% on that, but I assumed it was a good educated guess and was convinced to tell you all about it. I did sell into that last rally and sold even more last week because I fear a pretty nasty decline in our near future. I suspect there is going to be some revelation that regional banks are having a tougher time than we think and that some type of ‘Black Swan’ is about to take center stage.

This is why I am somewhat bullish shot-term on the dollar as the flight to safety picks up steam, which it will if I am correct. This, however, is very bad news for commodities which will become far cheaper in the near future as the dollar strengthens. In fact, this looks eerily similar to last summer before the real crisis hit. Now, I do not think things will get that bad, but anything is possible. The good news for all of us ‘gold bugs’ is that gold will get much cheaper moving forward. While I think gold will go lower short-term I am a long-term bull because we will eventually have inflation and that is why I always say buy gold in increments and not all at once.

Now, the Elliot Wave International CEO thinks the dollar is going to multi-year highs, but I highly doubt that. We will be the last country to absorb our excess liquidity, if we ever do absorb it, compared to Europe and other countries. Leaving the liquidity will either devalue the dollar further, which is my opinion longer term, or it will create inflation according to all the experts. Both way, this is a short-term outlook and you need to invest for the long-term, but make adjustments to what you can see in front of you in the present.

There is no doubt that we are heading for something pretty interesting and while I will not be happy to see my GLD and SLV, plus physical, go lower I welcome the buying opportunity. In fact, I am very excited over the prospect that palladium could go as low as $200 or so as I have had my eye on a 2006 Canadian Palladium coin. I also think we could see platinum drop to the $900ish area as well, which is exciting if you have been looking to buy some below its pricey $1,200 current level. Silver could drop back to the $10ish area and gold could drop to the low $800ish.

Remember, I am a long-term bull on precious metals, just currently a stronger dollar is not good news for them right now.

The World is in Trouble

Posted by Ray on August 12, 2009 under Main | Be the First to Comment

This is not just my opinion, but that of Deutsche Bank Chief Economist Norbert Walter. He brings his concerns to an interview to CNBC.com and he has very strong, reasonable concerns for his comments. I am on the same page as he is and have brought my concerns over the economy and the dollar to my readers for a long time now. This, in my opinion, merely ads credibility to my opinion and throws aside the thought of those green shoots we hear so much about.

If things were fine then we would have seen some real action from the Fed today, certainly if things were as fine as CNBC and other media outlets claims it is at least. Regardless Mr. Walter went on to say; “I believe that the rescue packages brought on have been so costly for so many governments that the exit from this fiscal policy will be very painful, very painful indeed,” he said. “Some of us are already talking about a W-shaped recovery. I’d probably talk about a triple-U-shaped recovery because there are so many stumbling blocks here to get out of this.”

This sounds pretty familiar to me as it is the same concerns I have echoed for some time now. However, I am not so bleak in my outlook and expect a W recovery and pray that we do not have a triple U pattern, which is possible, but, hopefully, unlikely. He went on to say that many companies thought the recession was going to be shallow and did not layoff people even as sales deteriorated, but that will change in the near future, according to Mr. Walter.

He also has concerns over Australia’s potential interest rate increase in September, which is possible, and says the “markets will certainly shiver” if that happens. He, as I, also has concerns over the dollar as the current administration wrestles with health care and has put an exit strategy on the backburner of the Fed’s monetary stimulus. The Fed’s actions will only increase our troubles as cheap money got us here in the first place, but now we have so much more to worry about than cheap money like the monetization of our debt and the printing of more dollars.

Mr. Walter went on to say; “there are big concerns of about the direction of the U.S. dollar.” Followed by; “I’m deeply worried about the worries of those investors who have invested a lot, really a lot into the dollar” like the Chinese, Japanese, Arabs and Russians, he said. All of those countries, with the exception of Japan, have voiced some concerns over the safety of the dollar. Their concerns are with merit, I might add, as we are issuing more debt and have monetized a lot of our debt and I am sure that will continue after October.

He concluded with these comments; “If they have second thoughts about the quality of this currency then the dollar is bound to weaken” which means higher long-term interest rates for a country where government debt is approaching 100 percent of gross domestic product, he said.

If that happens, “2010 could be a worrisome year for all of us,” he said.

These comments are echoing my concerns, but they are even darker than I thought is possible. This is why I have always allocated more of my money to non US securities, usually keeping only 20-25% in the US and the rest invested internationally, mostly Asia. I have also taken great pain to find other alternatives such as precious metals, GLD and SLV are OK, but physical metals never hurt, and sovereign government debt, like the PCY which I have talked about a lot.

Regardless, these are not just my opinion and we should look at what Mr. Walter is saying with an open mind. While it is unlikely that we will have a doomsday scenario, like a currency crisis, but it certainly does not mean that things will not get very bad. This is why I believe in hedging and others should as well, but I digress.

The Fed Holding the Line

Posted by Ray on under Main | 2 Comments to Read

The Fed notes are fairly interesting in that they said absolutely nothing new or bullish. In fact, besides soft peddling the bad data, they said the same thing as the last meeting with the exception of keeping the quantitative easing until October of this year, which will be extended again next meeting I am sure. Regardless, the Fed actually confirmed that the consumer is stretched and broke while businesses are cutting back on investment.

I guess the good news is that they are keeping rates at near zero and the QE program. If the economy leveling out means it is dropping at a significantly less rate then I would agree. Unless they are seeing different data from what is available to me, Dave Rosenberg, Peter Schiff, and on and on then I do not see what they view as positive. Regardless, stocks liked it, a lot, which allowed me to sell out of my US holdings to a risk adverse level.

I lowered my US holdings to 10% and reduced my foreign exposure to 20% leaving the rest in corporate bonds and short treasuries. I am grateful for today as I was kicking myself for not reducing my holdings to these levels last Friday. I may miss out on a couple of points, but I am convinced that a serious correction is heading our way which will trickle into the foreign markets. However, I am still holding my PCY, which has done very well for me especially as the dollar continued its downward trend today.

In a nutshell, there was nothing compelling about any of the news today even the real estate news was not that positive. Unless you consider rising property values in Elmira NY good news, Elmira is a town about an hour from where I live and its biggest employer is the prison system, so what does that tell you? Furthermore, inflation is still tame, even from my view, but I believe the weaker dollar will have the same impact as inflation over time which is why I still hold my GLD and SLV, which is not accounted for above, but it represents about 13% of my total holdings.

We will have to see where this goes, but my guess is we are in for a rude awakening in the near-term. Because of that I would keep some powder dry to go in when we are lower in the indices. A rally with virtually no selloff is simply not healthy and I hold my opinion from last Friday and recommend cash as a significant portion of your portfolio as we are right about where we were last Friday, again.

The Dollar, Markets and Gold

Posted by Ray on August 11, 2009 under Economy, Markets | Be the First to Comment

We have had a nice rally in the dollar which has cooled a bit today, but it should have spelled disaster for gold, but it did not. A higher dollar also means equities are under pressure and yesterday we should have had a nice selloff instead of a flat day, more or less. However, the real story is gold and its ability to not get crushed under the weight of a strengthening dollar.

Those who read my articles regularly know I am bullish on gold, mostly as a hedge against a weak dollar, but also for long-term inflationary pressure. Regardless, a higher dollar usually spells disaster for the price of gold and while the price has reached, in my opinion, a nice entry point it has held up rather well in the face of the dollar. This is telling me that clearly demand for the yellow metal is in high demand and the fundamentals remain strong.

It is also telling me that the flight to quality has begun as the dollar increases, gold increases and equities decline. As stated several times, the market has priced in perfection for economic growth which should scare you to death because we will never get perfection. The fundamentals of the economy remain weak, regardless of what you are hearing or reading, and this weakness will become apparent moving forward into the fall.

I think it is evident that 3Q GDP will surprise most, but not at a 4.5% growth rate. I think a number of between 0-2% is about right, but hey let’s not let the facts get in the way of the new bull market. Unemployment, housing and commercial real estate are the major weakness in the economy and until we get actual stabilization in these areas, not just a one month reading, but a multi-month reading, then GDP will not grow at some of the ridiculous numbers of 4%+ that we hear being kicked around.

As the dollar weakens today we will see some strength return to equities, but we will also see gold move higher as well. I do not think this trend is long-term as I believe that firms are positioning themselves for the flight to quality that will happen in the next 30 to 60 days. The fall is usually weak for the markets and this is a cyclical move, in my opinion, however the coming market turmoil that is expected will exacerbate this move and we should see nice dollar gains followed by higher gold prices.

I believe that we will have several entry points for gold so I would recommend dollar cost averaging in over the next couple of weeks, buying on weakness. I really like the metal below $960 an ounce, but it could go lower, but I am a long-term bull. Volatility is going to be high in the near future so buy with your head, not your emotions. If you want to trade it then use charts and disregard my comments as I am a holder of the metal, not a trader. If gold is too rich for your blood then buy silver which I believe has plenty of upside potential, perhaps even more than gold especially longer term.

I own the GLD and SLV.

Gold, a Liquidity Bubble

Posted by Ray on August 6, 2009 under cnbc | Be the First to Comment

CNBC interviewed Gold Fields CEO, GOLD, and questioned him about investment demand citing investors are not fearing inflation, which is not true. Mark Haines, who I like, then went on to ask if ETF ownership is creating a liquidity bubble in the yellow metal. I guess this is a legitimate question, but when you add up CNBC’s position on gold it is always negative.

I see a pattern of anti-gold bias on CNBC even as most people recognize gold as a legitimate investment and hedge against the dollar and inflation. The irony is that Fast Money had an advisor from Morgan Stanley on last night who is an ultra wealth advisor and they asked him directly about the gold and inflation trade. The advisor did say that his clients are concerned about inflation and the dollars weakness, which means they are buyers of the yellow metal.

I am by no means a “gold bug”, I find that name so insulting anyhow, they do not call stock fanatics, “stock bugs”, but I recognize the importance of gold in a portfolio and own it myself. I believe any well rounded investment portfolio needs to have exposure to precious metals and other inflation protection investments. To not have that exposure is crazy.

Either way you cut it CNBC definitely does not like gold and consistently “talk it down.” To clarify, I do not believe CNBC is holding the price down, someone accused me of that before, what I am saying is they dismiss gold as an investment which is inaccurate at best.

Disclaimer: I own the GLD, SLV.