When in Doubt Sell the Dollar to Save Stocks

Posted by Ray on August 27, 2009 under Main | Be the First to Comment

This seems to be a continuing theme for whoever is driving the markets to the moon, sell the dollar and buy equities. If you were watching today you would have noticed that oil, gold and stocks were trading down to relatively flat. Right about 12:00 the dollar started to decline which drove stocks and commodities higher.

This is a continuing trend within the markets and the primary reason why we have had such a dramatic rally. However, the reduction in buying power is not worth the trade off, in my opinion. If you are watching the news channels they attribute the markets turn on higher oil prices and virtually ignore the dollars plight, even though it is a weak dollar that moves oil. Why are they ignoring a declining dollar, I do not know, but they are.

There is really no reason for the market to be positive today as unemployment numbers were not very good, but, I guess, no revision in 2Q09 GDP was somewhat good news. Either way, we are seeing continuations of a very tired bull market were the likes of AIG, Citi, Fannie and Freddie are the market leaders. While the talking heads applaud this move I am reducing my equity position to 7%, down from 25%, most of which is international holdings.

Frankly, we are setting ourselves up for a most painful selloff which I am choosing to not participate in. I do not know when it is coming, but it will come and I am sure it will be brutal. The likes of Mark Haines seem to think that my view is very bullish for stocks, maybe it is, but I consider my view to be balanced with the data on hand. The data I see is horrible, frankly, and when AIG and Citi, both of which heavily owned by the government, are the market leaders then we have a serious speculation bubble building.

Examine the chart below, the data at hand and make your own call. I am sticking with the call I made 3 weeks ago, which we are barely 2% higher than now, of a market top. Of all the people I have spoken to, no one understands why we have not sold off yet and, perhaps, we will not. Until earnings catch up with valuations or valuations trade down to earnings I am very bearish on equities.

The Dollar’s Slide Leading the Turnaround in Stocks

Posted by Ray on August 19, 2009 under Main | Be the First to Comment

Who says the commoditization of the equity markets isn’t a good thing? This morning the dollar started out fairly strong which led to lower equity prices, rightfully so given the over extension of the equity markets, but that turned in the late morning. The dollar began to sell off, perhaps because of Buffet’s op-ed piece published this morning.

Regardless, it is clear that the markets are merely responding to a lower value for the dollar versus any real economic or other data points. Of course, this is not being talked about by the media or others who merely trumpet this as a continuation of the ‘new bull market’, with bull being the operative word. While the dollar is weaker by about .50% today I expect that there will continue to be strength in the near future as the markets realize that things are not as rosy as they think.

However, the crude inventory report is being perceived as bullish with rather large draw downs, but I believe those draw downs need to be put into perspective. Demand has been so weak in the US that the import of oil has trailed down recently and without that replenishment of more oil it was inevitable that the draw down was going to happen eventually. Because I believe it is relatively weaker demand and imports have been reduced I am not seeing this as a long-term bull more in crude.

With the report being framed as bullish it caused the dollar to lose strength which has the trickledown effect of higher equity and commodity prices. Outside of this resilient rally most trends do not go in a straight line which is why I expected the dollar to fluctuate. Because of this volatility I have not added to my gold or silver holdings as I believe we will get lower prices in the near future.

While I am a short-term bull on the dollar that does not mean I think it is a long-term trend. In fact, I believe the PIMCO report and Buffet’s concerns are very valid and why I am a long-term bear on the dollar. Regardless of my view on the dollar it is still the place to run in the event of catastrophe which I expect to see in the near future by some ‘black swan’ event.

As I have said many times, enjoy the rally, but the buying power of the dollar has not really increased as it is a mere tradeoff between the currency and the equity markets. In a nutshell, it is more of an inflationary event, minus the actual inflation as of right now, instead of a real economic event. This does not change my prediction of a sharp, painful decline in the near future, September to December area, where we could see spectacular movements in the indices.

Please review the 1 minute chart below comparing the S&P 500 to the DXY. There is a clear connection between the dollar’s decline and higher equity price movements, but most people will ignore it and continue on with framing everything as a recovery or green shoots. As I have said before, this much liquidity, printed by the Fed, in the market can make spectacular things happen. Either way, I am very happy with being out of equities as we are still heading lower.

A Market Top Signal

Posted by Ray on August 7, 2009 under Main | Be the First to Comment

We have commented on the dollar’s weakness for a while now, but today we are seeing surprising strength in the dollar index. This is telling to the markets potential future behavior as investors tend to move into the dollar when the economy is questionable or they foresee potential problems.

For an example of this move just look to last fall when the dollar had huge gains against all major currencies. Why do people move to the dollar during economic turmoil is a very important question and the answer is fairly obvious, we have the most liquid market in the world, you can buy whatever term of government debt you want from 1 day to 30 years, and you will get your money back since we have never defaulted on our debt. However, while we guarantee your money back, we do not guarantee the buying power of that money.

The dollar’s strength today, in the face of a “better employment report” or the latest “green shoot” the dollar should be declining in value as the risk trade should be on. The problem is that it is up over 1% for the day and, in my opinion, is signaling that some major players think there could be some rough days ahead in the risk trade. I do not think you need to be a rocket scientist to figure out that it is nearly impossible for the markets to go straight up, but it has since July.

I do not have any data on who is buying, but my spidy senses are tingling and when you see a contrary indicator go off, equal to the markets move, you have to react. I am reacting by reducing my US equity exposure to 15% and I may take all US equities off the table by the end of the day. The other point of interest is that even with such a move in the dollar commodities are rather tame, gold is down slightly, silver is up and oil is down slightly. With such a move in the dollar these commodities should be crushed today.

As you know I am no bull in this market, a first time in years I might add, but this should make everyone pause and reflect on your current allocation. Corporate bonds are a good haven, in my opinion, as they are only pricing in flat GDP growth versus the S&P pricing in 4.5% GDP growth. I also like PCY which is an ETF sovereign government debt fund yielding over 6%, I do own this security, which could be a good place to go for 2 reasons:

1. It is out of the dollar, which I am a long-term bear on, and;
2. It has a nice yield and has performed fairly well during the last economic downturn, it recovered very quickly.

Here is the DXY Chart:

Disclaimer: I own PCY.

Are you buying this rally?

Posted by Ray on July 30, 2009 under Economy, Markets | Be the First to Comment

I believe the market is very overbought right now and the data does not support this massive run in the indexes. Below is the YTD chart of the S&P 500 with various technical indicators. I think you have to judge the earnings, economic data (or lack there of) and technical analysis.

I do not believe this rally is sustainable and is a head fake. Not only does this rally feel over extended it is also largely based on the weak dollar. Below is the YTP chart of the DXY vs. the S&P 500. What is funny is that CNBC and others on shows like Fast Money actually think a cheaper dollar is good for the US. They acknowledge the movement between equities and the dollar strength, but totally ignore its impact on the country long-term. Commoditization of our equity markets is not good and is a problem.

It is up to you whether you want to jump into this market or not, but I am a seller into this rally. I do think it will continue to move higher with much more volatility, but the correction is inevitable even though no one knows when it will come. My guess is in the next 30 days we will see a sell off that will start small and intensify into the fall.

All is not rosy in the world, contrary to popular belief, and the global economy is starting its second leg down. We typically have these unusual moves before the markets begin to struggle and sell off. A few months and wads of cash cannot fix things over night and that is what people will realize in the near future, especially since real estate, residential and commercial, are still a mess.

As I watch the talking heads now they keep saying this is the best run since the 1930′s. Shouldn’t that be telling you something? Tread carefully in this market and if you feel like you missed the run, do not worry you will get a better price in the near future.

Disclaimer – I am short the dollar/Euro pair.

I am a seller

Posted by Ray on July 23, 2009 under Main, Markets | Be the First to Comment

I am selling into this rally for a few reasons. Specifically I am selling SPY and some mutual fund holdings, Schwab S&P 500 index fund. However, I am holding my TIPS, high yield and international funds, specifically PCY and BIK.

Why would I do this? Statistically speaking it is impossible to continually have the markets increase everyday. Furthermore, I am bearish and see the weakness as the dollar as the driver of stock prices. I will more than likely re-buy in the near-term, maybe tomorrow.

I think earnings will be very good moving forward which will drive prices higher, especially international orders. The weak dollar is the primary reason for firms, like Intel, delivered spectacular, even though earnings were revised downward, earnings. I expect Microsoft to have strong earnings tonight.

At the end of the day, the market is overvalued.