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Well the dollar is starting to matter.

We talked about this back in August and it has always cast a shadow on our trading as I've never been able to get all gung-ho while ignoring this pressing issue.

While we were all out having turkey, the rest of the world took a long, hard look at our balance sheets and downgraded us.

As our debt is looking riskier to foreigners, the rumors that the Fed will LOWER rates to boost a slowing economy make no sense at all to buyers of international paper (or to anyone who actually understands economics).

So let's be very, very careful out there as things may LOOK good over here but to other countries we look a lot more like this:

US-Dollar 27 11 06

And that is not good in any language!

I don't want to make things sound dire but, since Wednesday, the dollar is down 2.3%. That means that a European or Asian investor who has a portfolio of U.S. stocks lost 2.3% of his value across the board in just 3 days. That's the equivalent of a 250-point Dow drop!

We are going to be needing some pretty exceptional retail numbers to convince foreign investors that our economy still has legs...

Let's not forget that we asked for this when we told China to strengthen the Yuan. Currencies don't strengthen in a vacuum and for the Yuan to rise something had to fall, and it's no surprise to my readers that the dollar would end up suffering.

All of this is right in line with my Inflation Nation policy, but it's a fine line between a steady devaluation and a total meltdown so let's watch our gauges! Asian markets were up, except for the Hang Seng, as investors there become concerned that the government will have to take action to curb the dollar's fall. Japan has already made noises about keeping a rate raise off the table to keep speculators out of the Yen and to maintain the "carry trade" where investors borrow Yen to buy Dollars, taking advantage of the interest spreads.

Europe is having a 1% sell-off and companies that get paid in dollars are being hit hard, a strong indicator that European investors don't see any great fixes ahead for our currency.

You would think Europe would be in a good mood as crude prices have slipped 2.5% in the past 3 days, something we are blissfully unaware of as the contracts are priced in dollars that are falling just as rapidly.

I need to go home tonight and get back to my spreadsheets to figure out new targets on oil but just realize that, from a foreign trader's perspective, oil has dropped $1.40 (2.3%) and is trading at our magic $58.56 watch level which is now $59.96 at these dollar levels.

With the whole planet on the short side of the dollar it may be a heck of a time to go contrarian, but let's be very careful about that! We'll keep an eye on gold which has moved a very unimpressive 2% since last week, meaning it mirrored the dollar but picked up no fear premium on dollar weakness.

Let's also keep an eye on our market levels, which held up so well last week! Will international investors see a 2.5% drop in U.S. equities as a buying opportunity or a sell signal? Either way I'm very glad I moved to mainly cash last week!

We are just .3% away from breaking below the 2.5% rule (halfway to the 5% rule) on the international scene, so it's bounce here or take our lumps:
The Dow needs to retake 12,300 early or we will be testing 12,200 in very short order. As soon as we lose 12,250 I will be sell, sell, selling!

  • TRANQ 2,650 is the companion line here.
  • The S&P is holding 1,400 but there's a fiery pit just below and things are not looking good for our hero.
  • NYSE will give us the earliest trouble sign if it breaks below 8,900 but we are still hoping for the great escape over 9,000.
  • The Nasdaq will open below 2,450 and needs to retake it to give us hope.
  • SOX 490 should not be a dream as we are so close, and Vista ships today (to major corps), but 480 will be a nightmare!

It's been a while since I pointed out some petty, juvenile, stupid thing that the Bush and his pals are doing as I hate to kick an administration while it's down, but this one ticks me off.

Bush has renominated the same group of judges that were rejected by the Republican controlled Senate last year as being too conservative.

This is a pointless waste of everyone's time and accomplishes nothing other than telling the new Congress that Bush hasn't got the slightest interest in working with them. In addition to clogging up the courts with doomed appointments he is also jamming through some that are 100% opposed to "the spirit of compromise."

  • He's putting up Andrew Biggs, who wants to privatize Social Security (the Dems have already said no) to a six-year term as the deputy of that agency.
  • He's appointing Eric Keroack as chief of family planning at the Dept. of Health and Human Services. Eric belongs to a Christian group that is opposed to contraception for women, but he will control the $283M budget that is supposed to grant women access to supplies, services and information.

So it'll be business as usual in Washington for the next couple of years -- at least the markets seem to like gridlock!

================================

I'm traveling today and I'm glad I don't have to sweat the day out as it is likely to be something better viewed in retrospect, but if the markets turn up there may be a few good plays to make!

Sometimes I'm right so fast I can't take advantage of it! Retail sales are really, really good and we might have a hard time picking up bargains if all we get is positive news.

ShopperTrak says U.S. retail sales rose 6% vs. last year's "Black Friday" and they are projecting a 5% increase for the season to $457b.

But ShopperTrack does not measure on-line purchases which are up 109%, according to payment processor Retail Decisions.

If this data bears out it will be a very interesting holiday shopping season indeed!

Wal-Mart Stores Inc. (NYSE:WMT) is looking a little disappointing but that plays in with the Consolation Prize Theory that people are simply moving upscale in their purchases. We need to keep a close eye on Target Corp. (NYSE:TGT), who should benefit, as well as our old pals at Best Buy Co. Inc. (NYSE:BBY), Federated Department Stores Inc. (FD), Nordstrom Inc. (NYSE:JWN) and Saks Inc. (NYSE:SKS) to see how far this trend is trending.

Of this group, all but FD look short-term overbought, so any additional strength from this group will bode well for the retail sector. FD is looking good, although not as good as they looked earlier in the month when they sold off to $39 but I still like the Jan $45s for $1.05, as long as they can hold the 50 DMA at $43 -- right where they are!

TGT is also right on the 50 DMA at $57.50 and I was hoping for some reason they would test the 200 DMA at $52, but it's not looking likely so I will be keeping an eye on the Jan $60s.

In comments, Optionstrader1 made a few suggestions I thought I would address here as they are all good choices (but again, only if the others are heading up and the markets are holding our levels as we still have a dollar crisis to overcome):

  • Sears Holdings Corp. (NASDAQ:SHLD) -- I just sold it so I'm not ready to go back in and I see no compelling reason for them to break $185.
  • Guess? Inc. (NYSE:GES) (and other clothes) will likely be slow out of the gate as people try to grab electronics and other things they think will be sold out first.
  • I would love Mastercard Inc. (NYSE:MA) on a pullback, but American Express Company (NYSE:AXP) is more likely to pop with the Jan $60s at $1.50.
  • Another credit card company I like is Morgan Stanley (NYSE:MS) (Discover) if they pull back a little.
  • Abercrombie & Fitch Co. (NYSE:ANF) we are already in and I would buy more on a pullback if we get so lucky.
  • Best Buy Co. Inc. (BBY) is very stretched and needs to test out $55 but it's hard to resist the Jan $55s for $3 when I can sell the Dec $55s for $2 at the first sign of trouble!

Let's not forget Circuit City Stores Inc. (CC) (12/19), BBY's very ugly cousin, where I go to get away from the crowds. They have beat and beat and beat again this year but are getting no respect with 17 holds and a sell against 10 buys. I'm playing CC for a long-term reversal on the Jan '08 $22.50s for $5.50 and selling the Jan $25s for $1.40, a spread I can live with!

The problems with retailers is that there's a million of them so I'll be diving into the bargain bin for my main picks on Tuesday, once we get a real look at which way things are heading.

Read all of Phil Davis's articles on Seeking Alpha

Source: Options Trader: Monday Morning Ideas