Preparing for the Dollar's Next Down Cycle 18 comments
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By Sean Hyman
One thing I learned early on in my investing and trading career was that I can’t trust analysts or the news media! I learned that not only are these guys not as knowledgable as they should be, but that they also don’t alert everyone to the fact that things are changing until well after the fact.
One reason is because analysts and the financial news media make horrible investors. They’re okay at reporting or analyzing but not in laying down the money into investments at the best times.
Another reason is that analysts work for firms that are biased. They want to get on all of their positions first (as they trade “in house”) and then only alert you afterwards. That way, when you listen to the analysts and news reports, you are simply pushing up their positions and making them look like a genius.
Pros use this gauge rather than listening to analysts/financial news media!
So if I couldn’t trust analysts and I couldn’t trust even the financial news media to alert me to when to start making new investments in the markets, then what is an investor to look to in order to feel that they know the worst is over? Commodities!
Now this is not to buy the actual commodities but rather to use them as an indicator for buying stocks and currencies.
I look to major commodities like gold, copper, oil, steel, lumber, and even a commodities index...the CRB index (which holds a basket of commonly used goods).
Why commodities? Because when an economy is turning around, companies will need to use these raw commodities to make their products in order to expand their corporate earnings.
You see, copper alone is used in residential and commercial wiring of buildings, plumbing, computers, cars, etc. So the increase in demand for this commodity shows up first as companies then use the commodity to make the product that they will soon sell to the public or corporate America.
Oil only starts to perk up when the demand increases. So you will see the rise in the price of oil first, and then later on (months later minimally) the reports of the increase in demand will follow.
When an economy comes out of a deflationary (or even disinflationary) period back into a typical inflationary period, you will see it first in the rise of commodity prices. After all, inflation in its simplest form is the cost of goods going up in price. Well commodities “are those goods”.
Now what in the world does this have to do with using it to help to better time stock and currency purchases? As the demand for these pick up, the economy is in the “very beginning stages” of a recovery. That’s the best time to buy stocks for the long haul (with cash, nothing margined).
It’s also the best time to go into currencies that have a higher yield than the U.S. dollar. Lately, many exotic currencies have been rising vs. the buck as the rise in commodites has taken place (like the Turkish lira, South African rand, etc. ). However, now this has spread to developed nations too that you may be more familiar with such as the euro, Australian and New Zealand dollars. See the chart below and you’ll see what I mean.
The Euro and Oil Follow Each Other Over Time!
As oil fell, so did the euro vs. the dollar. As oil is perking back up, so is the euro vs. the dollar. So basically, if you have a feel for oil prices or even gas prices at the pump, then you have a basic feel for where the EUR/USD pair is going even though you may or may not have a background in currencies.
Why does this phenomenon take place? Largely because oil is denominated in dollars which means that as the dollar goes up in value, it strengthens against oil. You could also say as oil gets cheaper (in dollar terms), your dollar goes further in purchasing the same amount of oil (or gas) as before. So these two, over time, tend to travel opposite one another.
So why vs. the euro? Because the euro is nicknamed the “anti-dollar”. It’s named this, because when people flee the greenback, it’s the first place that they go to because it’s the next biggest market and has the next biggest pool of liquidity. So if the dollar is being shunned, the first place money goes to, generally, is the euro.
So when you put all of this together, this is why the EUR/USD tends to track oil (and vice versa) over long periods of time.
The Worst is Over, yet Still Some Bumps Left!
Since oil, copper, gold, lumber, etc. have all started to perk up and have broken their downtrends, this tells me that the “worst is over”. Now it doesn’t mean everything is rosy from here! Far from it. There will be bumps along the way on the road to recovery.
However, despite those “road bumps”, you will find that historically these are the best times to start accumulating new stock and foreign currency positions (like the EUR, AUD, NZD vs. the buck).
Bottom line: Don’t listen to the analysts and financial news media. Instead, learn tips like this that we professionals use to get a “head start” on the masses in your investing. Most people don’t know “when” to start accumulating stock through ETFs or mutual funds. They also don’t know the first thing about foreign currencies. However, the dollar will start a new “down cycle” soon, and those that know what to do can profit from it!
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Pump and Dump?
On Apr 09 07:05 PM Cetin Hakimoglu wrote:
> Agree. Long term, yea, the dollar is doomed. The fed printing press
> is in overdrive. Euro will rise to 1.6 against the dollar.
It's down about 20% from last summer against the US dollar, and we
all know the US dollar is going to fall after the economy recovers
Few observations,
1) One can also look at CADJPY pair in relation to the Oil prices, both being the commodity currencies with CAD having high oil exports, and Japan being net high oil importer (99% of oil consumption imported), the pair can be used to suit one's own style of trading.
2) However commodities prices and industrial demand can be dubious indicator for one that existing inventories have reduced for the last quarter which saw less industrial production, so this might be temporary increase in production levels compared to previous months' low base (effect).
3) The retail sales ex-auto sales would rather give more accurate and sustained answer to the questions sighted above, the unemployment numbers also give a clearer picture.
But at this time I would still be wary of buying aggressively in stocks, I don't know: gut feeling or due to the gloom and doom all around!
One reason for this is that stocks have run a huge % since March lows far from justifying their forward earnings for this and next year-visibility for which is still cloudy.
Any comments?
As far as common stocks go.... I would be satisfied to lose a couple of percentage points of upside to confirm the next "Bull Market". The market can lose it's steam quickly during times like these. Confirmation is the key, all else is speculation.
This so called bull seems to only be a bear market rally. There may be a number of these bear market rallies before we see the fundamentals improve.
As far as I can tell, the author is also dependent on investors to make their living, so you also have a bias favorable to a premature market recovery.
fundamentals, fundamentals, fundamentals
The current wave indicates re-stocking. Re-stocking by commodity consumers and traders who have got rid of high priced ones recently and have been running hand to mouth. Re-stocking of commodities by countries like China and South Korea for better times ahead and also as to partly diversify away from US Treasuries. Re-stocking by hedge funds who have been sitting on no-yield cash for quite sometime. Re-stocking and cautious value-picking as rationality takes control.
However, market seems to be equally divided over the current rally as a bear rally or beginning of a bull turn. Quite blurred at the moment. I am keeping powder dry.
Well, since the internet is a medium, does that mean we shouldn't trust you?
Just wondering...
Whatever next?
On Apr 10 07:26 PM Nathaniel C wrote:
> Sean--The best leading indicator for economic recovery is the Baltic
> Dry Index which tracks shipping rates worldwide. It is far more
> accurate than movements of commodity prices which are not based on
> fundamentals but instead money flow from institutions and speculators.
> The Baltic Dry cannot be traded/manipulated. What does the Baltic
> Dry Index say about a possible recovery? It has declined for the
> last 20 days (approx. 35%) even though markets are surging higher.
> This tells me that this is a bear market rally which has been started
> by panglossian fools. Smart investors are gradually shorting stocks
> that have surged 70-100% in the last 5 weeks based on hope of a recovery.
> Remember, "hope" is not an investment strategy.
The only green shoots Obama thinks he can see is are the flashes from Bernanke's Zippo lighter. Shame he cannot smell the gasoline fumes. As an economist I would rate Bernanke as an Arsonist.
On Apr 10 06:38 PM dybydx wrote:
> So basically what this means is that OPEC doesnt sell oil in USD,
> they sell it in Euro.
It is so constructive to examine a Baltic chart. If you look at what it did during the last bear market in '00-'03, you see that it bottomed in late '01 and was getting into a climb during the mid to late '02 period while the stock market was bottoming. And in early '05, the Baltic was down sharply months ahead of the sharp cool down in commodities and stocks in May '06. It then turned sharply up in early '06 while the market came down and months ahead of the sharp market climb and commodity craze in late '06 and early '07.
The Baltic Dry wasn't that much of an early warning for the market moves of '08, pretty much moving in line with the market, perhaps because these moves were precipitated by a bunch of banking/credit crisis mumbo jumbo, not the usual economic cycling the Baltic is used to dealing with. But now that we're back to economic cycling in what is hopefully the aftermath of all that, what is the Baltic doing? Well it bottomed with a technically attractive head and shoulders bottom in early December. It seems to have gotten back into the groove of outwitting the market by a few months, having formed a nice climb over '09 so far with just a 20 day pull back recently that Nathaniel C mentions. It was climbing like mad all during February while stocks tanked 20%.
If the Baltic Dry Index is indeed back to its ways, then the December bottom would seem to predict a significant market turn about 6 to 12 months past December. That was 5 months ago, which predicts a turn over the next 6 months or so.
this isn't propaganda, but we area slowly decaying empire and you can see that clearly when looking at foreign relations, rise of brics, and the fact that we are spending more energy clinging to outdated systems (protecting vested interests) than getting ready for the future.
euro is already at 1.30. was higher. trend shows down, which goes against the market going much higher right now.
On Apr 10 10:33 AM David Roskoph wrote:
> Only this time capitalism itself was on the precipice and that was
> a game changer. Dollars are multiplying fast but America remains
> the greatest and most evolved franchise on the globe. As such, we
> define capitalism; now upgrading to the 21st century version. The
> strength of the dollar is a testament that the world "gets it"; without
> us they flounder back to their previous isms. Gold will now join
> it commodity brethren, losing its role as a central bank instrument;
> replaced by what? The dollar.