Posts Tagged ‘dollar’

What does the dollar rally mean to investors?

When I used to date (before I got engaged), I never tried to kiss a girl unless she confirmed her interest in me.

A first date was never enough. People date all the time and it leads nowhere.

But if the girl was fiddling with her hair, touching my arms and telling me how I was a “strong and powerful Puerto Rican”, well, I would definitely kiss her by the end of the date.

Other guys I know aren’t as conservative. They try and kiss a girl whether she shows interest or not.

These are the same guys that spend money that they don’t yet have. Or that put all of their money on one big bet. And the same ones that try and predict tops and bottoms before they ever happen.

Their success in the stock market – as with the ladies – was limited.

I guess you can say I’m on the safer side of things. I like to wait for confirmation before I act. With the girls, as I explained above, I like them to show an interest in me. I don’t like to spend money I’m not holding in my hand. And I definitely don’t try and pick tops and bottoms in the market before they happen.

Rather, I ride out the trends and look for predictable buying or selling opportunities to take advantage.

In yesterday’s issue, I told you that I wouldn’t become a bear until the 50-day moving average was breached on the major indexes.

One thing I didn’t cover though was the dollar.

Careful observers have noted that the buck is now above its 50-day moving average. On Friday, I explained the relationship between the dollar and the stock market. Suffice it to say, a rallying dollar is bearish for the stock market.

But just because the buck is above its 50-day doesn’t mean I’ve become a bear. As I said before, I like to see confirmation first. In this case, confirmation would only happen if the major indexes drop under their 50-day moving averages (10,076 on the Dow Jones).

In the end, you have to stay realistic. Don’t let ideology drive your actions in the stock market. Instead let the market guide you.

Even though the dollar broke through a major resistance point, the trend is still up for the stock market.

Act accordingly.

Two Outcomes for the Dollar Carry Trade

Right now the dollar carry trade is fueling the stock market as traders borrow the buck and buy riskier assets (anything else). So when will it all go bust? I’m not sure, i’m not Miss Cleo. But I do see two possible outcomes.

Outcome #1 : Dramatic Fed tightening pushes the buck higher as carry traders sell off their assets and buy back the dollar. In this scenario, markets would plummet viciously.

Outcome #2: The Fed raises rates slower than the rest of the world and the carry trade continues. Eventually, higher interest rates  make the carry trade less profitable and the Japanese Yen, which also has near 0% interest rates, becomes the carry trade of choice. In this scenario, the market keeps moving higher.

What the Feds do depends on inflation expectations. If everyone anticipates higher inflation, the Feds will jack up interest rates quickly. But if  inflation isn’t a concern (the view at the moment) then interest rates won’t move up so quickly.

The economy is running on pointless tax credits and stimulus spending, nothing else. And the U-6 unemployment rate will likely hit 25% by the time this thing bottoms out. So I doubt the Feds will raise rates before the second half of 2010. And if the Feds do raise rates earlier, it just means that inflation expectations had gotten severely out of whack.

That’s why the dollar carry trade will soldier on and keep fueling this market until next year. Sure, we might see a few minor 5% – 10% sell-offs over the next few months. Hell, the Dow may never pass 11,000.  But I doubt we’ll ever see 6,000 on the Dow Jones ever again.

MARKET TREND OUTLOOK

The trend is still up, but the major indexes are all overbought. So we’ll probably see a 3%-5% sell-off.

Use any major sell-offs as entry points unless we see a lower-high, lower-low pattern forming.

Charles Delvalle Here…

Hey Everyone,

Charles Delvalle, here.

You might remember me from Financial Goodness blog and from reading me regularly in Investor’s Daily Edge.

This is my new blog.

And because it is simply a new blog that I put up in about two hours time, it looks a tad “rough around the edges”.

Be assured this, just like the final days of George Bush’s Presidency, will soon come to pass. I have some big ideas for how to take this blog to the next level. And I welcome any input or comments from anyone letting me know their thoughts on getting there.

In other words, what do you want to see on this blog when you come everyday? What do you want to learn? How do you want it presented?

I can be a sarcastic ass from time to time, but the truth is that’s not going to change.

And right now, i’m a pessimist. Because i think this stock market downturn has a lot further to go. But i don’t want you to confuse my longer term outlook with my short term one.

Just because i think stocks have further to fall, doesn’t mean i think it’s going to happen come Monday… or Friday, or even the week after that.

I use technical indicators to give me an educated guess as to how the market will move in the short term. For the long term, i look into over reaching trends in the financial world.

This is what i know, that you, dear reader, may not be aware of…

- Banks will cut back Credit Card balances by Over $2 trillion next year. This at a time when the US consumer is relying more on credit cards just to pay the bills.

- The commercial real estate market is starting to see more losses. It was a profit party there too as regulation and prudence got thrown by the wayside.

- More hedge funds and corporations will go bankrupt next year then we’ve seen in a long time. This will add to the jobless numbers quite significantly. Not to mention all the liquidity that will get squeezed out of the system.

See why i’m so pessimistic? Just because the government saved GM today doesn’t mean that GM won’t continue to layoff nearly as many workers as it would have had it gone bankrupt. All it means are that the job losses will be spread out over a few years and not all at once. Therefore, the impact isn’t as strong, but it lasts a lot longer.

Kinda like taking cold medicine. Your symptoms last longer, they’re just not as bad.

With all of this in mind, i feel that next year might only be slightly better then this year, but overall it should still be bad.

People just have way too much debt that they need to pay off.

But you should know that the seeds of a new “bubble” are certainly being sown today. Ultra low interest rates and a flood of new money will be sure it happens.

Some say the new bubble is US Treasuries. But that makes me wonder what are people considering bubbles? It would seem to me that a bubble takes place over a long period of time. The real estate bubble didn’t take a year, it took a few. And so did the internet and commodity bubbles.

But US Treasuries? The dollar is in a long-term downtrend. I don’t see how there could be a bubble there. All there is is short-term panic. And the panic should come in waves throughout the next year.

Once the panic subsides, treasuries will drop. Doesn’t seem like a bubble to me.

But alternative energy… That, I feel, will be the next big bubble. And it will be fueled by at least four years of positive government help, too.

I’l talk a little more about that next time.

-CD

P.S. I have some big ideas for how to take this blog to the next level. And I welcome any input or comments from anyone letting me know their thoughts on getting there. In other words, what do you want to see on this blog when you come everyday? What do you want to learn? How do you want it presented? Comment below.