Market Bias Remains to the Upside

Given its druthers, the market would rather move higher than lower, and that's important to note. It doesn't mean that an upside move is justified, but it does mean the market is sending a message. Thus far this year, not listening to that message has had dire consequences. Sure, at some point everything eventually changes but unless you are one of these guys that write white papers, or can be wrong for years and still eat, then fighting the trend to wait for the inevitable is a mistake. There is only room for a few doom and gloom guys to walk around with their chest pumped out even if they were a couple of years early. Your goal should be to walk around with your pockets pumped up. An old friend of mine famously told me (on more than one occasion) "my ego is in my wallet." (Of course, there is a place to take a stand even when money is involved, though there is no way an individual investor should become so invested with a stance they miss the boat.)

On that note, I came into yesterday's session tip-toeing around not based on market action, but based on some simple guy that believes a pullback is due. The market is mysterious, but that isn't the same as frightening. The bias is to the upside even though the market could pullback on a series of earnings disasters. Speaking of which, the report from Mosaic (MOS) looked like a classic disaster after the close. The company posted earnings of $0.23 per share on $1.46 billion in revenue; the Street was looking for $0.35 per share and $1.54 billion in revenue. Year over year profits were down 92.0% and revenue fell 66.0%. The stock barely nudged lower in the aftermarket in part to an overall feeling the bad news was going to come coupled with upbeat comments from company CEO Jim Prokopanko, who pointed out improvement in gross margin and improving fundamentals in phosphates.

Speaking of pricing power, I think that it's going to be the buzz phrase that propels stocks higher. Case in point is Caterpillar (CAT), which uttered the magical words yesterday, and got agricultural and mining equipment stocks moving. Management at Caterpillar says that it will raise prices on most of the equipment it sells by 3.0% in the first quarter of next year. Interestingly, the news sent the share price soaring but on extraordinarily thin volume. Of course, Caterpillar also benefits big time from the weak dollar, and that continues to be one of the more compelling stories in the financial world. The dollar is in a fiery descent and didn't even pause for weekend lip service from the usual suspects. It's a dangerous double-edged sword because there is a point when the weak dollar reflects poorly on the nation. Some, like my friend Steve Forbes, believe we should already be desperate.

The Drowning Dollar

The dollar is acting the way it should be considering monetary and fiscal policies. Moreover, massive unemployment and sinking home values actually augur for the dollar being even lower. Then, there are forces acting in concert against the dollar that are conspiring to weaken its value and prestige.

There is a frightening article in the Independent that outlines a (nefarious) plan by central banks from Russia, China, Japan, and Brazil to create a new world currency. Apparently, Middle Eastern countries are involved as well in an effort to eventually stop pricing oil in dollars. The pot is being stirred by China looking to control oil supplies. However, along the way it could turn out an alternative to the dollar could trigger selling among central banks that leads to its collapse.

China's Oil Play

In 2008, China imports of oil increased 9.8% to 178.9 million metric tons, or 3.6 million additional barrels a day. It cost China $129.0 billion. So, despite being the world's leader in solar and wind technology, China has worked aggressively this year to secure oil for its future. While "oil" has become a four-letter word in America where politicians have sold the notion we are going to switch to alternatives overnight, China is preparing to be able to fuel its economic growth. It's not just oil of course; China is acquiring minerals through joint ventures and outright purchases around the world. (If Michael Moore ever wanted to make a movie to benefit Americans, it would be a documentary on China's blueprint to supplant the United States as the world's number one economy/powerhouse.)

In February this year, China made a series of moves that underscores their determination to be prepared for a revival in the global economy.

• $25.0 billion loan-for-oil deal with Russia which sees a 6.0% interest loan secured with a deal to get 300,000 barrels per day over the next 20-years.
• $10.0 billion loan-for-oil deal with Petrobras of Brazil.

• Chinalco takes $19.0 billion stake in Rio Tinto, the third largest miner in the world.

• Sinopec buys Addax Petroleum of Canada to gain access to reserves in Kurdistan and West Africa, and total proven reserves of 536.7 million barrels.

China also has an $8.0 billion deal with Iran to develop refining capacity and gas production, along with deals in Sudan and negotiations with Libya.

Then, there is Brazil, which in my mind had an announcement yesterday more impressive than snagging the Olympics. Brazil announced that it will lend money to the IMF, buying $10.0 billion in bonds secured by the IMF basket of currencies. This is the first time that Brazil has lent money to the IMF. It was only back in 2002 when the IMF made its biggest loan ever of $30.4 billion to help Brazil avoid a massive debt default. Brazil has also expressed an interest in moving completely away from the dollar, too.

You know a funny thing happened on the way to a one-world society, China and the other BRIC countries stepped in to hijack the transition. The IMF, headquartered in Washington, DC and controlled by Europeans, will face internal pressure from China and others. Already this year China has pledged to buy $50.0 billion in Special Drawing Rights (SDR), and that was followed by a $10.0 billion purchase by India. Word is that Russia is working on a purchase of a similar amount.

Add into the mix Middle Eastern countries holding massive amounts of dollars and it stands to reason they may desire more flexibility. Abu Dhabi, Saudi Arabia, Kuwait, and Qatar hold $2.1 trillion of dollars in reserve.

The dollar is under attack from all angles, and for now the stock market loves it.

Dollar ETF

Technical View

Keep an eye on the Russell 2000 Index, which continues to impress. The index bounced off its 50-day moving average on pretty good volume. The small guys have been like the little engine that could, and I suspect they will continue to lead the parade in part to the fact the big boys have to whet their appetites and make more acquisitions as the economy heals.

Comments

[Papaswamp:]

China also snapped up a third of the IMFs SDR bonds (with Brazil, Russia and India being the other big buyers). Something is afoot...

Oct 06 11:31 AM

[Larry House:]

The bias is up until it isn't.

Oct 06 03:14 PM

[tripleblack:]

Could be. Note the wild rumor about a deal to dump the petrodollar and substitute gold and a basket of other currencies...

Lots of the same players there.


On Oct 06 11:31 AM Papaswamp wrote:

> China also snapped up a third of the IMFs SDR bonds (with Brazil,
> Russia and India being the other big buyers). Something is afoot...

Oct 06 05:50 PM

[untrusting ...:]

Your comment and info on MOS is the key.
1) EPS expected = $0.35
2) EPS actual = $0.23
3) EPS yearago = $2.65
4) Revenues down 66%
Would be hard to have much worse results except maybe to file for bankruptcy.
5) Yesterday's close= $46.09
6) Today close = $47.90
Up $1.94 or 4.22% in one day on disasterous results.

If one needs to see anymore evidence of how totally irrational this market is, we cannot imagine what it is. In any type of rational market this stock would be at the March lows or less instead of near the 52-week highs.

Oct 06 07:17 PM

[untrusting ...:]

The bias was up in Dec/07 too, but based on even less fundamental weakness than now. Just goes to show that the market can remain irrational for lengthy periods of time.


On Oct 06 03:14 PM Larry House wrote:

> The bias is up until it isn't.

Oct 06 07:24 PM

[Moon Kil Woong:]

I think China is ascribing to the following theory: What do you buy when the dollar is going down the tubes? Buy anything. It seems to be echoing in commodities and equities recently. The real question people are wondering now is does the Federal Reserve really want this type of mentality?

Oct 07 02:43 AM