A Bad Day For The Dollar

Let’s run down the headlines today –

Geithner boasts about how the US Government has successfully used Taxpayer money to refinance 500,000 mortgages.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0VZEj.oK9Wg

Word comes out that the Federal Housing Administration may need at least $50 Billion to remain solvent. The FHA insures mortgages (think Freddie, Fannie and Geithner’s new masterpiece). At least 27% of the mortgages insured by FHA that were written in 2007 are now seriously delinquent or worse. 20% of the 2008 originated mortgages are now seriously delinquent… or worse.

http://dealbook.blogs.nytimes.com/2009/10/08/is-fha-the-next-shoe-to-drop/

Mortgage Application Up +18.2% last week as the Fed buys mortgages to artificially force down interest rates. The money used to buy these Mortgages was created by taking TARP money and levering it up 10 to 1 at the NY Fed - $30 billion at Freddie and $30 billion buys $600 billion in mortgages for the US Taxpayer.

http://www.mortgagebankers.org/NewsandMedia/PressCenter/70556.htm

Mortgages are the Red and Green blobs –

I told you that they would raise the taxes on those with jobs to raise the entitlements of the unemployed. Democrats extend Unemployment Benefits to (infinity and beyond) and propose to raise taxes on Health Insurance companies.

http://hotair.com/archives/2009/10/08/pelosi-wants-windfall-profits-tax-on-insurance-companies/

http://www.marketwatch.com/story/democrats-unveil-plan-to-extend-jobless-benefits-2009-10-08-171800

The Fed is worried that owners of Commercial Real Estate will not be able to refinance their debt when it comes due in the next 18 months, because so much of this property is under water.

http://www.businessinsider.com/fed-starting-to-freak-out-over-commercial-real-estate-2009-10

Oh yeah, and the Democrats are now talking about Stimulus 2.0. When the first $1 trillion was so successful, why not print up another $1 trillion and flush it down the toilet too...

http://apnews.myway.com/article/20091008/D9B76AUO0.html

What do all of these headlines have in common? They all tell how the US Taxpayer is either subsidizing prices or subsidizing Interest Rates – we can only execute these programs by printing money.

The Result
The Dollar was getting creamed last night and Gold is breaking out of a gigantic trading base. Apparently the Central Banks of Asia hit the panic button and started to sell the currencies of South Korea, Hong Kong, Taiwan, Thailand, the Philippines and maybe Indonesia to buy Dollars. I think the Dollar was on the brink of crashing and these guys decided to prop it up for a little while longer.

http://www.cnbc.com/id/33233199


I’ve been telling you ever since Paulson and his cronies decided to screw the US Taxpayer and use Inflation to bail out the banks, that this was the only possible outcome. The Dollar will crater, because those in charge do not want to do what is required to fix the real problems in our economy.

And who says that I am cynical… I just read too much.

Economist On Why We Need A Weaker Dollar

For over a year now, I have been ranting about the need to weaken the Dollar. I know that it has made some of your stomachs turn. However, my logic has simply been that a weaker Dollar makes US Labor more competitive and will lead to the creation of new domestic Manufacturing Jobs.

Former World Bank chief economist and Nobel Laureate Joseph Stiglitz had this to say on the topic -

“One way of looking at it is that the U.S. has turned to exporting T-bills instead of automobiles or other commodities. Global demand for dollars has supplanted demand for manufactured goods and services, resulting in multilateral trade deficits and loss of jobs at home.”

From MIT Economics Professor Simon Johnson today -

http://www.thedailybeast.com/blogs-and-stories/2009-10-06/obamas-secret-jobs-plan/?cid=hp:mainpromo2

“…think what a weaker dollar does for the industrial heartland, where so many congressional seats will be in play and where today it’s easier to export or compete against imports because the same dollar costs convert into fewer euros, yen, or renminbi (this is what a “weaker” dollar means—foreigners can more easily afford our goods and their stuff is more expensive to us). If the dollar stays weak or declines further, our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we’ll finally get some job growth as part of our sputtering economic recovery.”

He also when into the mechanics of a “Carry Trade” –

“If you can borrow in dollars and buy Australian (or Korean or Chinese, etc) government debt, you are in what is known as a positive “carry trade”—because of low interest rates here, you pay close to zero to borrow the dollars and you can invest in Australia at more than 3 percent interest (or you can plunge into speculative Chinese automotive stocks, as Goldman is now doing).

And if you think interest rates will rise in the rest of the world before they do in the United States, because the dollar is on its way down, then this carry trade becomes a one-way bet: You make money on the carry, you hold foreign currency while the dollar falls, and then you pay back your loan in depreciated dollars.”

This is what they did with the Yen over the last Business Cycle. Now it is the “Dollar Carry Trade”.

I did this post to show that I am not some raving lunatic, hell bent on killing the Dollar and redistributing the wealth of the US to the rest of the World. I posted this to show you that the end game has to be a declining US Dollar. It is the only way to bring Manufacturing Jobs back.

The weakening Dollar has obvious investment consequences – the most important of which is that if you want to maintain your Standard of Living relative to the rest of the World, then you need to position assets to protect yourself against a falling Dollar.

The Charts Are Set Up

There are lots of charts that have the same pattern. Most are orderly pullbacks into moving averages and now the downtrends are being tested. The markets are setting up for yet another fast move. Will this one be up or down?

Mid Cap 400 (MDY)
MDY got overbought on September 17th (Red Arrow) and has been consolidating ever since. It has gone from being stretched 3 Standard Deviations above the 20-day to closing today right below the 20-day (Black Arrow). Guess where my stop buy order is?

Here is the daily chart for MDY. It pulled back to the 50-day and is now set to make a big decision. If buyers show up, then I am in. If they don’t, then I will look to buy MDY at lower levels.

Austria is the gateway to Eastern Europe and the Austrian ETF (EWO) serves as a proxy for much of Eastern Europe.

Singapore is still sitting in its trading range.

Commercial Real Estate has also pulled back into its 50-day. That’s a pretty orderly pullback, don’t you think?

Apple broke out of its trading range today. Nice goal line save, UBS Analyst. I hope you get a nice bonus from our TARP Money. Or maybe it’s bonuses from our Tax Cheats…

China National Offshore Oil (CEO) closes Friday being below the 50-day and then gaps up two straight days (a $9 rally in 7 hours) to now be testing resistance. I’d love to see a breakout above this 3-month trading range. At some point, the mystery bids and Futures-driven rallies will cease or fail and the markets will get hammered. Until then, I play the breakouts.

Several High Growth Leaders are set up. Several others have already broken out. All in all, I think that things are pretty constructive. For disclosure purposes, I can have orders in to buy all or none of these. And I can change my opinion without letting you know.

New High For Gold

Gold ETF (GLD)
For the majority of 2009, GLD has been trading in a tight consolidation (Black Lines). I have mentioned on numerous occasions that these consolidations lead to violent moves either up or down. In September, GLD broke out of its trading range on big volume (Blue Arrow). GLD quickly rallied from $95 to $100.

Gold hit a new All Time High today. Gold has been in an 18-month trading range. It broke out of the trading range on significant volume today (Red Arrow). I hope the breakout holds.

Gold Stocks
Royal Gold (RGLD) has been in a trading range for 10 months.

Randgold Resources (GOLD)
This is a pretty educational chart. In 2008, GOLD was in a trading range and put in a triple top at about $57. The third attempt to break $57 failed miserably (Red Arrow). GOLD imploded and did not recover back to $57 again until April 2009 (Green Arrow), 9 months later.

I am hoping that GOLD breaks out above $75 and goes higher. There has been a lot of buying volume the last 2 months. I am hoping that means strong buying from the big boys. However, following the failed breakout last year, I am nervous about trusting the next breakout.

Canadian Dollar (FXC)
The Canadian Dollar is a Commodity-Based Currency. To me, that makes it an anti-US Dollar investment, so as the US Dollar, FXC should rise.

FXC broke out of a 2-month trading range today on large volume (Blue Arrow), hitting a new yearly high.

Crude Oil (USO)
USO is an interesting chart. USO has recently broken its uptrend from its early 2009 low. It then rallied right back up to touch the trendline from below. Normally, this is extremely bearish, but in this new World, where asset prices are not allowed to go down, this could be the perfect setup for a monster short squeeze.

I’ll bet a heck of a lot of shorts have stop losses set right around $38. If there are, then I also suspect that when the time is right, the computers will light up and throw a lot of buy orders at the market to trigger the short stop limits. Or maybe they just gap USO up hard one morning above $38 and trigger all the short stop losses all at once. Or USO just rolls over and crashes.

Any way you slice it, I expect some significant fireworks in Crude Oil in the near future.

Why Is Gold Potentially Breaking Out?

http://www.ny.frb.org/newsevents/speeches/2009/dud091005.html

William Dudley, The President of the New York Fed, gave a speech yesterday entitled “A Bit Better, But Very Far From Best”. Remember, the NY Fed is the group that has levered up the TARP to buy lots of Toxic Waste Bonds from the US Banking Industry and the Central Banks of Asia – so his input is pretty important. In his speech draws the following conclusions about the Economy -

“In summary, I believe the current balance of risks around the inflation outlook lie to the downside due to the very low level of resource utilization and the fact that long-run inflation expectations remain stable. This balance of risks is problematic because the current level of inflation is already so low—the core PCE (personal consumption expenditures) deflator has increased only 1.3 percent over the past 12 months. Thus, we would not need much of a decline in inflation to run the risk of an outright deflation. Outright deflation, in turn, would be a dangerous development because it would drive up real debt burdens and make it much more difficult for households and businesses to deleverage.”

So we face high Unemployment, low Capacity Utilization and falling prices (Deflation). Deflation is economic death in the eyes of Bernanke. They call him “Helicopter Ben”, because he has stated before that he will do such crazy things like drop money from helicopters before he allows Deflation to occur.

The speech by Dudley simply tells the World that the US Government will keep printing money and running up the largest deficits in history. They will do anything to keep asset prices from falling and Deflation from rearing its ugly head.

The US Dollar
Bernanke and Team Obama chose to fight the Credit Meltdown by using newly created Dollars and accounting tricks to prop up the prices of worthless bonds. They moved Trillions of Dollars of crap off the balance sheets of US Banks and Foreign Central Banks and onto the books of the US Taxpayer, via the NY Fed and Government Agencies. Foreigners are onto the game and probably extremely uncomfortable with holding Dollar-denominated assets.

In my opinion, at some point the Dollar will collapse under the weight of all the deficits and printing of new money – it can be a slow motion melt or an over crash. The long term goal no doubt is to lower the value of the Dollar, because that will make domestic manufacturing cheap and allow us to start rebuilding our Middle Class. Like Volcker has said, at some point you have to make the decision between cratering the economy and cratering the currency.

Australia
Overnight, Australia actually raised their Interest Rates by .25%. In the past, raising Interest Rates leads to a flood of money into your country as leveraged, cheap money chases returns. This should continue to put still more pressure on the US Dollar.

The Upgrade Game

AAPL
Late last week I sent a chart of Apple to a buddy of mine. The chart was simple. It showed AAPL in an 11-day trading range. On occasion, you can see the line in the sand that has been drawn to show where the big boys are defending a stock. On AAPL, that level is about $180.

The next morning, UBS “Upgraded” AAPL and raised their “Target Price” to $265. I am not smart enough to tell you where the price of a stock will be on 10/02/2010… Neither is the UBS “Analyst”. He isn’t really telling you that the price will be at $265 in a year. He is trying to support the price of AAPL and doesn’t want it to break $180.

Do you really think it is a coincidence that the upgrade came out when AAPL was on the verge of breaking $180? The “Upgrade” was done to drive buying and Short Covering. We’ll see if it works. $180 needs to hold. $187 needs to hold if you are Short AAPL.



Goldman Upgrades Banks Today
Goldman did the same thing today with the Bank stocks. The Banking Index closed below the 50-day on Friday and then gapped up above the 50-day on the Goldman Upgrade. That is the game.

When the big boys no longer open up their wallets to defend obvious support levels, then the game is over. All I can do is identify these levels and get defensive when support is ultimately broken or rebuy when resistance is taken out.


Wells Fargo was specifically cited by Goldman today. See how WFC closed Friday well below the 50-day (Black Line) and right at support (Blue Line)? After the upgrade, WFC opened just above the 50-day and closed 4 cents below the 20-day. Volume was down 20% today, so it was easy to jam the Futures higher with the lack of volume. What a scam…


I love these multi-week pullbacks, because they allow leadership to set up in new bases and give me new potential entry points. I already mentioned AAPL and you know that I am eyeing KBE above $24.

I looked at the charts of the IBD 100 over the weekend and I like how the charts of 24 of them are setting up.

I will look for rotation out of early stage leaders (Financials, Technology and Transportation) into later stage leaders (Industrials, Materials, Energy).


September ISM (Institute for Supply Management)
Today’s ISM Numbers were nice improvements over those of August. They indicated the first expansion in 12 months. But the number that really popped out at me was that of Prices Paid. Prices Paid fell from 63.1 in August to 48.8 in September. Holy cow!

What this means to me is that the Fed must keep jamming cash into the system to Deflation from taking control and blowing up the pricing of Debt. Cheap cash allows for massive speculation and we know what that has done to the pricing of risky assets.

Gold rallied $14 in the hour after the ISM numbers were released. Crude rallied 3%.

We Lost Some Leaders Today

On September 1st, the markets were down hard on pretty meaningful volume. They then sat around for a day, before rallying sharply over the next few weeks. September was a great month.

Today (October 1st), the markets were down hard on average volume. This is now the 6th down day in the last 7 trading days and the down days have been on decent volume. Will the markets repeat September and just magically rally again or have we entered a more meaningful selloff?

Leaders
International has been the leadership area since late 2008. A lot of Countries broke the 50-day today.

Japan (EWJ) looks the worst, breaking the 50-day and falling lower. The 50-day is important, because it is where the big boys either decide to defend price and buy stock or let price fail and add to the selling.

China (FXI) has also broken the 50-day and is now sitting at trendline support. If the big boys want to pound China, they can do it right here. They can also break it out if they want to. I got stopped in on the failed breakout and may get stopped out soon. We’ll see how it plays out. Either FXI will break down and give me an entry at lower prices, or it will break out and trigger me into more shares above $44. Many Chinese stocks look suspect – CEO, PTR, SNP.

There are a number of Countries and Regions sitting right on their 50-day averages – Canada (EWC), Singapore (EWS), South Africa (EZA). Mexico (EWW) and Hong Kong (EWH) have broken slightly below their 50-days.

Sectors
Several Leadership Sectors have blown up.

Semiconductors
Semiconductors (SMH) got hammered today, breaking the 50-day on big volume. Many stocks in the sector took significant hits today and have broken support – Texas Instruments (TXN), national Semiconductor (NSM), Intel (INTC), Qualcomm (QCOM), Applied Materials (AMAT), Linear Technology (LLTC), Cypress (CY). AMD looks like a pretty nasty top. Remember, the Markets follow Semiconductors, not the other way around.

Housing
The Home Builder Index (XHB) broke the 50-day today and is on the verge of a potentially meaningful breakdown. Several Home Builder stocks look terrible – Ryland (RYL), DR Horton (DHI), KB Homes (KBH), Meritage Homes (MTH). I mean they look TERRIBLE.

Financials
The Banking Index (KBE) hasn’t broken the 50-day yet, but it is close. However, a number of banks looks nasty today – Bank of America (BAC), JPMorgan (JPM), Wells Fargo (WFC). These are important stocks.

I see a lot of stuff breaking the 50-day. I haven’t seen this in a while and will be watching the internals very closely over the next few days. Several key sectors are getting sold hard. That could reverse tomorrow or continue.

I think the markets will slow their rate of accent and you will see much more money focused into fewer and fewer sectors and markets. This will mean that you cannot buy anything and hope that it will go up, you will need to be able to identify and focus on the stuff that is working best.

Greenspan spoke the other day and said that he thinks 2010 will be a year where the markets just sit around and go nowhere. My experience has been that markets never just sit there. They are either bought because they are going up or sold because they are going down. On net, 2010 may begin and end at the same price, but it will probably have quite a rollercoaster ride getting from beginning to end. Or they will just pound stocks in late 2009 and that will give 2010 a much better chance of decent performance numbers. We’ll see.

If they do decide to ramp the market again, it will probably be after prices sit around for a day or two. I have a small buy list and will do a lot of detailed homework this weekend. I will be looking for what is holding up best, because that is normally what leads when prices start back up again.

Weakness Arrived As Expected

I mentioned late last week that I expected a pullback or a pause. The last 3 days, price has stalled and is now sitting on the Red Line (Blue Arrow).

I want to point out how price has broken above the trading channel of the rally off the March low (Dashed Blue Line). Moves through the top of the trading channel are often the final blow off moves before an extended consolidation. Note how I wrote consolidation and not Bear Market or Crash. The breakout above the channel in 2003 extended to a 9% rally over the next 5 weeks. Price then sat around for 9 months.

I would expect the next consolidation to last a couple months and be more of a period of rotation from former leaders into new leaders rather than a Market Top and selloff. I’ll let you know if things change, but for now there simply isn’t much that is breaking down.

Here is the 30-minute chart on SPX. The September uptrend has now broken and we appear to be in a consolidation period. I sold some stuff when price spiked more than 2.5 Standard Deviations away from the 20-day and am looking to reload as either price falls towards back into a rising 20-day.

I keep mentioning the Dollar versus the prices of Risky Assets (Stocks, Junk Bonds, Commodities). Here is a chart of the Short US Dollar ETF (UDN) versus SPX. I am a slave to this chart. The Dollar gets extended and stock prices rise, then the Dollar consolidates and pulls back into the 50-day (Blue Line) and stocks consolidate. The Dollar started a new leg lower (UDN up) in early September and SPX went vertical.

Here is the Point & Figure Chart of the US Dollar ($USD). That is a Major League downtrend! The vertical count method targets at least 67 as the next low. This is not a recommended “Target Price”, it is simply a method of counting that Charles Dow used to figure out how far momentum may carry price.

My guess is that $USD will retest and probably break below its 2008 low near 70. My operating assumption is that risky assets will continue to trend higher until the Dollar hits this level and then we get our “correction” or “Bear Market”. Until the Dollar breaks out, that is my operating assumption.