The market has not been able to hold a rally as the dollar strengthens which shows that the 60% rally we witnessed was purely liquidity driven. Essentially, the Fed, in their infinite wisdom, decided to drive investors out of less risky assets into high risk assets in order to re-inflate the asset bubble. While the Fed was busy pumping money into everyone’s pocket, except for the peoples, it has cost the dollar much of its value, or so you think.
Actually, the dollar is not near its lows of 2008 yet, but when the DXY was at 89 and it fell to 75 it felt like it plunged in value and had me concerned. I am still very concerned on a long-term basis, as I see a runaway government with deficits as far as the eye can see, but since everyone and their grandmother was short the USD, it was a given it was going to go up. Since this rally was a liquidity weak dollar rally a strong dollar will drive equities down along with commodities, which I wrote about on Sunday night I believe. As predicted, we had a super rally in the dollar and stocks got clobbered along with commodities and I suspect that will continue for a little while as the dollar rally will soon turn into a fear driven rally.
Whether I or you like the dollar long or short-term is irrelevant as the US government guarantees return of principal. This explains why at one point in time people were paying negative interest rates to the US government to buy short-term treasuries during the crisis. It was worth it for the comfort to know you were going to limit your losses because at that time you did not know if your bank was going to open its doors the next day. Do any of you remember that? Anyhow, this strength in the dollar will create selling in equities, just like a weak dollar drove the risk trade.
This explains why I stopped buying gold and this explains why I got short the market well over a week ago. It is not that I am perfect or a psychic it is just that things change, quickly. The dollar is not going to go in one direction forever and stocks do not always go up. It is also clear to anyone who is paying attention to fundamentals that the market is so far ahead of itself it is bordering on insanity. Valuations do matter and we are at a point where the valuations are just way out of whack with what is real and people are setting themselves up for real pain by not realizing this now.
If you do not pay attention to the things that are happening on the fringe of the markets, like the dollar, then you will miss the things that matter the most and impact your portfolios the most. Long-term the dollar will decline unless Washington gets their act together, but they won’t, so be bearish on the dollar long-term until proven differently, by the way that long-term bearish dollar outlook is also bearish on US equities as well. However, a short-term outlook is completely different and driven by the here and now so don’t confuse the two. I could be wrong about what I think is going to happen, but so far, I am right on the money and I think we are headed for more downside pain in the very near-term.
I am a gold bug, there is no question about that, and I am a long-term bear on the USD because I know that Washington will never reverse their ways of the last 30+ years of fiscal irresponsibility. However, I feel that gold has made a huge run in the recent months and the USD has made a big move to the downside as well. This will not continue as stocks are beginning to struggle and earnings are not as good as many have expected.
This means that the dollar will more than likely see some strength in the short run which will drive stocks and commodities lower. This will certainly drive gold below the $1,000 level which will bring about a much better buying opportunity for those looking to buy. Not to mention, other metals have largely been ignored in the recent run up in gold prices, i.e. silver, palladium and platinum are well below their 2008 highs.
Whether or not this equity rally was liquidity induced or not is really irrelevant as the one true correlation that we can draw is that the dollars losses were stocks and gold’s gains. This will stop as we see a reverse in this trend in the near-term. I see this happening based on the trading patterns over the last few days and the market rally losing its ability to sustain itself. It is really unreal that the market could simply continue to move higher without much skepticism from participants on this fantastic move, but it is what happened.
The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time while we shed jobs and credit continues to contract. Not to mention economic growth is anemic at best, subtract government activity and it is downright ugly, but buyers in the USD will come back as the bearish trend in the short-term is actually bullish. Also, its inability to maintain a new low makes me think a rally is in store in the next few days, which is bad for stocks and precious metals.
Because of this, I am not buying any metals right now with the exception of palladium, it is my favorite and, in my opinion, has the most to gain no matter what happens. My feelings on the USD in the short-term is also why I am short the market right now, a position I opened 10 days ago and added to on Monday, and will more than likely add to. No matter how I run the numbers I am coming up with a fair value of the S&P 500 of between 800-900, but that is my opinion and what makes a market. Eventually, valuations will have to matter in equities and a stronger dollar will force a revaluation quickly, on the flip side a major devaluation would do the same thing I might add.
On a long-term basis, until Washington changes its ways there is no way anyone can be bullish on the dollar. Therefore, I am a buyer of metals on a longer term basis, but I prefer to use my head and unless something happens over the next few days I see no reason to change my mind. An important note is I already have a healthy position in all metals and I am not a seller, I am just not committing new money at this time.
As stated several times in the past there is a breaking point between how low the dollar can go before it will negatively start impacting the market. As my kids ask all the time, are we there yet? I think we are close, very close. As the dollar closes in on that 75 handle and the EUR/USD crosses the 1.50 mark it is becoming a major problem.
Why? A cheap dollar is great, in the short run, for international earnings, i.e. see Intel and Google’s positive FX results. However, long-term it is horrible for the US because it boosts productivity on false pretenses. Sure, our trade deficit decreases, but did it really? No, it did not. It also increases energy costs which is a huge problem when we have wage deflation and 10% unemployment. I believe that the administration’s goal was to devalue the dollar to boost manufacturing, but like all plans there are unintended consequences and those consequences are real and devastating to the people.
In effect, the devaluation process will wipe out the middle class and the Fed will certainly lose control over the process. Also, what does it matter if companies have record profits if the value of the currency is worthless? That is the potential problem we are facing right now. If the USD breaks below the 71 handle there is no bottom, none. Computers will then take over and without severe intervention then we are in big trouble. Unfortunately intervention means the printing of more money which means a weaker currency, see the problem?
The Chinese would help because they hold dollars? Oh yeah, why? Their currency is pegged to the USD so if the USD is devalued then their currency is cheaper to making their products cheaper to their largest client, Europe. So, why would they intervene? They would not. Perhaps Japan might, but I would not hold my breath they got their own problems. Your only hope is Korea and other smaller Asian countries and they do not have the buying power to stop it, they already tried to intervene a week or so ago and it did nothing. Getting back to China, they also hold large quantities of gold and other commodities, so they are hedged they really don’t care, I don’t think anyhow.
With that said, the Dow was up and then the dollar got pounded and we are seeing a down trend as that happened. We are at the point where the value of the dollar matters and that is a very good thing, finally. While I have done very well with gold and other metals, I care about the dollar’s value and so should you because a 60% rally means nothing if the value of those dollars is reduced by roughly the same real return. Right now I believe a move in either direction is bearish for stocks, but especially a lower dollar as it moves energy higher.
There is no question that the cheap dollar has had its benefits for the US in the short-term. It has propelled earnings higher for most firms who deal internationally, narrowed the trade deficit and pushed stocks higher at the expense of our buying power. It has also pushed oil and commodity prices, mainly gold and other metals higher, as well as the dollar continues to touch new 52 week lows.
There is a point where the cheap dollar begins to lose its appeal and begins to concern traders and we have to wonder if we are there yet. After we breached the 76 level on the DXY I actually expected to see a rebound in the greenback simply because it is such a crowded trade and other countries have also printed vast amounts of their currencies as well. However, this seems to not be happening and we are at the point where the 75 handle is in jeopardy of being breached.
Frankly, at this rate we are heading right to the 2008 lows of the 71-72 levels and there is not much there to stop it from going lower. All I have to say is if you thought $147 barrel oil was bad, try $200 or more a barrel. Yes, it could get that bad and food prices could go up as well, even though we technically have deflation energy prices would and could create inflation. This would be catastrophic considering we have massive wage deflation and a huge unemployment problem right now. I am inclined to believe that the treasury or the Fed would intervene if we breached those levels, but my faith is not strong and given the trading programs and deep pockets of the banks, ironically, because of the Fed it could become a crisis.
The odds are against this happening, but it does exist. If this does happen it would also not be good for stocks as there is a difference between cheap money and worthless money. It is not like I am the first to warn of such a problem, Jim Rodgers warned of this type of currency crisis in the recent past and thought it could be either the USD or the Sterling, since we both started down the same destructive paths. I will say that I believe the next 2 weeks will be critical for the greenback and everyone should keep an eye on it for an indication of its direction. A steep move in either direction would mean a selloff in equities.
I have been delinquent in really looking at some of the technicals, mostly because the economic data has just been so bad that I really never thought we would get to this level. Honestly, with the economy still shedding, depending on which numbers you want to look at I prefer the real numbers, but, 263K jobs a month and credit contracting at a record pace and a whole host of other nasty things I could rattle off who would have thought we would be sitting at Dow 10,000?
I think it is safe to assume no one thought we would be at this point, even just a few months ago very, very, few people thought we could see the market at this level. However, now we are right back at the levels where we were right before Hell was unleashed last year and the S&P 500 is about to hit major resistance right in this range and the Dow will have reached its 50% Fibonacci retracement at 10,300, or so. Therefore, we are right at the peak of where the technical equity rebound can take us on its own and the weak dollar is horrible for the US for anything longer than a short-term basis.
I would have to say that after the weak dollar rally and the retracement has hit its peak we will need real substance to sustain this rally and it is simply not there. Without government stimulus and government transfers we have horrible GDP growth. Intel, as I have repeatedly said, was a story about Asia and a weak dollar, not about a US recovery. This is confirmed by Dell saying the US PC demand is still weak, but the pundit dismissed Dell and refused to look under Dell’s press release, so you are left in the dark unless you are doing your own homework.
Clearly multinational firms are going to do well, but how well are they really going to do? Johnson and Johnson missed on the top line and they are a well diversified consumer defensive company. It is my belief that we will see more weak top line revenue growth, except from firms doing business in Asia or have international sales, thanks to Helicopter Ben. I firmly believe that Banks are still bad bets because of the lack of mark-to-market accounting rules. I know, JP Morgan had markup’s today, please, when you can mark securities to fantasy land of course you’re going to have markup’s. What surprised me is they only took $400M in markup’s and not $4B.
With real estate still in the tank, which is reflected in every piece of data shown by the government and even industry shill’s, there is no way banks are making money on their real estate holdings. With commercial real estate defaults up 7 fold YoY to $22B, from $7B last year (the really “bad” year), how in the world are things better? Not to mention junk bond defaults which are projected to hit 14% in the near-term. I simply do not buy a V shaped recovery or even a robust recovery for that matter and this is most evident in the employment numbers, which is a leading indicator for credit recessions.
Retail sales are a joke considering some 8,400 stores were closed over the past 12 months, many of which were the worst performing stores I might add. So, if you dump your losers and keep your winners do you think your sales comps will go up? Hmm, I am pretty sure they will. Of course, was this advertised on any of the media outlets this morning? Nope. Do you really think another 530-550K initial claims report tomorrow is going to be bullish? Either do I, but I am sure this cost cutting method will be embraced by CNBC as gross margins will improve.
As much as I want this to be over, believe me I do since I suffer as much as the next guy, there is no way that it is. Declining income, declining credit, increasing defaults, rising unemployment, declining spending and then throw in shrinking corporate revenue that pretty much proves there is not much of a recovery. I admit the data is getting better, but nowhere near where the talking heads claim we are at for a recovery. Sometimes I sound like a broken record, but a rising stock market is not a reflection of a healthy economy. The other major misconception that needs to be never, ever, mentioned again is how great the market is at forecasting the economy, it is not and never has been, it’s a myth. Otherwise, in 2007 the Dow would have been at 7,000, not 14,000 and there are about 100 other examples.
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