Wednesday, May 20, 2009

Watch the Dollar

Last week I speculated that Obama would have to go back and do a second “Stimulus”, because the economy is broken – too much capacity, both in facilities and employees. But I forgot how Team Obama deals with the creation of money – they don’t go to Congress and have it appropriated via a vote, they go to the NY Fed and have it printed by leveraging the TARP.

The rally yesterday was led by Financials, and now we know why. Today, the Fed released the revisions to the TALF program – the one that buys Toxic Waste off of the books of the Banks are ridiculously high prices and enriched Banks Shareholders (BAC, C, WFC et al) and Bondholders (think PIMCO) at the expense of the US Taxpayer (you, me, our kids, their kids…).

When originally constructed, TALF was supposed to only buy newly created Securitized Loan Portfolios (those created after 7/01/2008). This was designed to protect the Taxpayer from having to buy older portfolios of Toxic Waste (the 2003 – 2006 vintage mortgages where the homeowners are 30% to 50% under water and the mortgages are worthless). TALF has proven to be a complete failure, because nobody is borrowing and insolvent banks aren’t lending – they can’t.

Mortgage Pools purchased had to be Senior claims on 1st Mortgages that were being paid on time and were not Interest Only loans. I guess there went too many of these for sale…

TALF 2.0
The new TALF rules (effective 5/19/2009) make no mention of limiting purchases based on origination date and imply in roundabout language gymnastics that purchases will include Junior debt. I feel my wallet getting lighter and lighter…

US Dollar
As the Stock and Commodity Markets ramped higher yesterday, the Dollar got smoked again, taking out more short-term support.

The Dollar ($USD) and the S&P 500 ($SPX) have been virtual mirror images of one another. The charts show times of greed (Dollar falling, SPX rising) and fear (Dollar rising, SPX falling).

SPX is now in the range of pretty significant resistance, and the Dollar is approaching some decent support, so maybe these trends will take a breather soon. We’ll see.

The Euro ($XEU)
The Euro is the anti-Dollar for Central Banks. If you need a reserve currency other than the Dollar, the Euro is your most likely choice – the Dollar falls, the Euro rises and vice versa. Therefore, the Euro can also be considered a risk trade.

On this chart, I want to show you how the Euro has been moving in lock step with Silver and Gold. They all bottomed in October / November 2008, then rallied, then sat around for about seven weeks and have been trying to work their way higher the last few weeks. The Euro, Silver and Gold are clearly places where money wants to hide as the Fed embarks upon their Quantitative Easing experiment. So your stocks are up, but your purchasing power is falling. As I have said from the beginning, there is no free lunch…

SPX Versus Gold
Gold appears to be in the process of breaking out of a 14-month base. Taking out $1,000 could be incredibly profitable for Gold and Gold Stocks. I bought the pullback in Gold and am looking to add to any breakout.

Unlike the stuff that has been rallying off of the lows, I like the fundamentals of Gold and have no problem holding onto it. The only potential issue for Gold is that the IMF is threatening to sell all of their Gold to finance their SDR “currency”. The IMF has a huge supply of Gold, but any break in price caused by IMF selling will be one of the best buys of your lifetime. Make no mistake that when the IMF sells its gold, it is no longer relevant – so they may be reluctant to sell it.

Look at how Gold topped as the SPX bottomed in March. I would not be surprised to see a pullback in SPX coincide with a rally in Gold, which tests the $1,000 range. That is not a prediction, I am just eyeballing the chart and giving you my opinion.

For those who think that if you miss THE LOW, you can’t make money, take a look at how Gold has had many rallies since it bottomed in 2001.

This is a classic Bull Market, where price rallies, gets stretched above key moving averages and then spends months sitting around or pulling back into these moving averages, before rallying again. Look at how many times the 12-month average was touched and held (Blue Arrows). It broke down in late 2008, but then rallied sharply to recapture the Blue Line. I bought Gold (via GLD) on the latest pullback. I want to add on a breakout above $1,000. A failure in price below $836 would concern me.

The Euro
Here is a long term chart of The Euro. Like Gold, The Euro had a great move off of the 2001 low – a low created when the Fed made money super cheap, smoking the Dollar and setting up the Housing Credit Bubble.

The Euro broke out in Mid 2007 and ran for another year or so. It then topped and retraced about half of the 2001 – 2008 rally. That is normal. Now the Euro is battling to recapture the 2007 breakout point at about 135. I get really bullish on the Euro above 136.29 (Blue Line) and 137.72 (Red Line).

The British Pound(ed)
On a side note, look at the British Pound. Yikes!
Britain rivals the US in its desire to fix things via the printing of money. Maybe now is the time to take a trip to England…

The bottom line is that Dollar strength may lead to or result from a weakened risk appetite. That would be bad in the short run for stocks, commodities and commodity-based economies and currencies.

Dollar support lies at 81.46, 81.40, 80.50, 80 and 78.34
Those will be the areas where I would look for a reversal. Price may overshoot for a few days and then recover quickly. We’ll see how it plays out.

Euro resistance lies at 137.72, 137.76, 138.38 and 142.50

There is a significant band of resistance on SPX from 902 – 954

A retracement of the March rally may shortly be in the cards.

What I am Looking For
I want to buy strong sectors breaking out of big bases on heavy volume, or I want to buy strength pulling back into moving averages.

Here is the diagram of the Bull Market / Bear Market cycle for a stock from Stan Weinstein. If you have not read his book, then it is a must for your summer reading list (

From the diagram, you can see that stocks top, then trend down strongly (Bear Market), they then sit around for many months, before breaking out and trending strongly higher (Bull Market).

Do any of these remind you of Weinstein’s diagram?

These are all Commodities and Materials. They are most likely economic recovery plays, as well as real asset hiding places as the Fed prints money.

I had to wait to see where money would be focusing in this new Bull Market. I had the luxury to not have to chase, because I did not get creamed in 2008.

Now I will be looking to buy pullbacks into the 50-day (Black Line) and expect mistakes to get bailed out. The goal now is to own the leaders who are dragging the markets higher, and not the laggards that are getting pulled upward by an ascending market.