Early Look: Dollar Down Again

Includes: UDN, UUP
by: Keith McCullough

“There is nothing more deceptive than an obvious fact.”
-Sherlock Holmes

The global macro fact of the matter remains – when the US Dollar goes up, everything priced in those dollars goes down. That’s what happened yesterday. Let’s eliminate that from our minds and focus on today.

Today, the US Dollar is trading down again. And guess what? Oh yes dear leading indicator investors, those US Futures like that don’t they! The fact of the matter remains – when the US Dollar goes down, everything priced in those dollars goes up.

At one point yesterday, the inverse correlation was a perfect 1:1. The US Dollar Index was up +1% and the SP500 was down -1%. Perfect is as perfect does, so in Forrest Gump fashion I simply re-shorted the US Dollar (NYSEARCA:UUP) and started getting “long of” things that would augur well to a reversal in that one-day move (US Technology ETF and the Australian Equity ETF). While one day performance always matters, it does not a TREND make.

Never mind intermediate term TREND, across all durations in my macro model, the Buck is Broken. We have 3 Macro Themes that we issue at the beginning of every quarter here at Research Edge, and one of them has been “Burning The Buck”. Cramer, please stay in your cage. This banana is mine.

I have beaten this theme to a dead pulp in 2009, and I will continue to until the facts change. The fact of the matter remains – we are witnessing the most politicized directive that US monetary policy has ever seen. Don’t fight it folks. Capitalize on it. There are no incremental buyers of significance for the American compromise anymore. The US Dollar will not find a sustainable bid until Ben Bernanke raises rates.

Since the professor of Great Depression storytelling outlined his economic outlook at his Humphrey Hawkins testimony last week, the short end of the US Treasury yield curve has gone straight up. Straight up? Yes, straight up into the right hand corner of the chart – get one of the 50-day Moving Monkeys to give you their read on it. Throw them a banana and they’ll say “bullish.” Since July 22, the yield on 2-year treasuries have gone from 0.93% to 1.18%. By my math, that’s a +27% move in just over a week.

The Economist
had a great one-liner in their Future of Economic Theory feature a few weeks back: “real scientists don’t leaf through Newton’s Principia Mathematica to solve problems!” Mr. Bernanke’s rear-view considerations of what he learned in the library stacks about 1929 aren’t going to help you risk manage your finances either. Let’s seriously get with the program here Mr. Chairman. Mr. Market is embarrassing you.

Real-time markets are leading indicators. GDP, unemployment, and the history of Goldman blowing up levered long Investment Trusts in 1930 are lagging ones. For those who continue to manage other people’s moneys using Bernanke’s economic outlook as their leading indicator, all I can say is Godspeed.

Back to that Buck that Bernanke is Burning… here are the price levels and durations I am considering when I say that its broken:

  1. TRADE (3 weeks or less) resistance = $79.74
  2. TREND (3 months or more) resistance = $81.68
  3. TAIL (3 years or less) resistance = $82.77

I get to my numbers using these little mathematical monsters we fact oriented sleuths in math call fractals. I know, I know – these aren’t the kinds of things like a 200-day moving average that my 2-year old can plug into Yahoo Finance and belt over the box at Merrill. My levels are born out of a global macro multi-factor investment process. A mathematician would call it complexity or chaos theory.

I know, I know – that sounds like being a quant. So what? It’s better than sounding like a monkey. But if you throw my quant boys a banana over here, they’ll eat them too … and then they’ll smile, reminding you that complexity theory may be the most relevant scientific discovery since relativity. It matters.

The global market place is an interconnected and complex system with dynamically changing inputs/outputs. When “smart” people told me that spending so much time on macro was “style drift” 3 years ago, I actually had to grind my teeth and listen. Today, some of those people have closed their almighty funds.

Today is one more day where we have an opportunity to recognize that we have a wonderful opportunity in modern day finance. We have the opportunity to evolve.

We have an opportunity to quantify our decision making processes rather than qualify them. After all, this is a tidy way of auditing all of Washington and Wall Street’s storytelling. While fiction is entertaining, don’t forget that the stories theoretically make sense because they are made up.

Today is the first day this week where the immediate term reward in the SP500 outruns the risk. I have immediate term resistance/support at 995 and 965, respectively. If Bernanke’s free money bananas are on the table again today, eat’em.