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Andreas Schreyer, Founder and Editor of The Green Investor and the Investoblog, is a longtime investor and student of the markets and has been a financial newsletter editor since 2003. He continues as a partner at Fraser Partners and at MarketTrend Advisors, a full service investment advisory... More
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  • The U.S. Dollar Completes Bearish Head and Shoulders

    After a strong rally through the first half of the year, the U.S. Dollar has since taken a nosedive which has many people worried, and most politicians secretly rejoicing.

    The truth is that under the cover of strong U.S. Dollar rhetoric, our leaders in Washington have for the best part of 40 years, with a few notable exceptions like the 1993 to 2001 resurgence, promoted a weak dollar policy.

    According to many of the nation's and the world's top economic and monetary authorities, after more than half a century as dominant global reference currency, the U.S. Dollar is well on its way to losing its dominant status. As investors, this is the stuff we should really know about and understand, even if it is not popular. Our future wealth depends on it!

    The beauty about historic data is that it does not lie. You can debate how strong or weak the dollar is, has been or is going to be, and who is to blame, but the facts lay it all out very clearly:

    • Since 1971, when the Dollar's gold peg was broken by President Richard Nixon, the U.S. Dollar has lost over two thirds of its value against "hard" currencies like the Swiss Franc
    • Since the beginning of 2002, almost 9 years ago, the U.S. Dollar Index has lost over 35% of its value against a basket of foreign currencies (the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc)
    • Just yesterday, the U.S. Dollar marked new major lows against gold, which has been the best long-term store of value for millennia, and a new all-time low against the Swiss Franc

    The chart below shows how various currencies - and gold is increasingly acting like one - have fared against the U.S. Dollar since the beginning of 2009 (the U.S. Dollar being the 0% horizontal line.)

    Most currencies gaining against the U.S. Dollar
    Currencies gaining against the U.S. Dollar

    Gold is up nearly 50% in dollar terms since the beginning of 2009, and it is not alone. Precious metals as a group are way up, silver gaining almost 90%, and so are commodities from copper to corn. The strength in hard assets is also reflected in resource-based currencies like the Brazilian Real and the Canadian and Australian Dollars. All of which points to an inflationary trend. But it’s difficult to find a currency that has lost ground against the U.S. Dollar, even the Euro which had been declared dead during the recent sovereign debt crisis has managed to stay about even.

    Just last week, the U.S. House of Representatives took one step closer to an all-out trade war with China by voting in favor of legislation that would allow the U.S. to impose tariffs on Chinese goods. The bill is intended to pressure China to stop manipulating the Yuan and to let it rise faster against the U.S. Dollar. As they say, “you don’t throw stones if you live in a glass house”. Yes, the Chinese are currency manipulators as they have actively pegged the Yuan to the U.S. Dollar since July 2008, but there are no bigger currency manipulators than the United States themselves. What’s more, the U.S. depends on foreigners to keep buying our Treasuries, including China who has become the biggest foreign holder of U.S. debt paper.

    The weak Dollar policy is calculated and intentional, although there will ultimately be unintended consequences. Washington wants a low Dollar to favor what export industry is left, and a high Yuan to make Chinese products more expensive here to curb imports. But the more important reason is that the policy not only fuels liquidity creation and deficit spending, but the dirty little secret is that currency devaluation is the chosen path for dealing with the ballooning debt (borrow now and pay it back later in cheaper dollars.)

    The U.S. Dollar fundamentals look very bad. The fiscal and monetary policies of the U.S. Government have been leading to enormous triple deficits (Trade, Budget, and Current Account). At their most recent meeting the Federal Reserve worried about “uncomfortably low inflation” and pretty much promised more quantitative easing (creating more Dollars to buy Treasury bonds and other debt instruments) to help the economy.

    Technically speaking, the U.S. Dollar looks as bad as it does on fundamental merit. Its failure to break through overhead resistance near the 2009 high earlier this year signaled it was headed lower, and it has since lost over 12%. What’s a lot more damaging for the Dollar’s future prospects is that by breaking below 80 the U.S. Dollar Index (see the chart below) has completed one of the most reliable trend reversal patterns in technical analysis: the “head and shoulder”.

    U.S. Dollar completes bearish head and shoulder pattern
    U.S. Dollar completes bearish head and shoulder pattern
     
    The topping formation we have seen developing for the better part of this year is confirmed by the completion of the “right shoulder”, which just happened when support was broken at the neckline. Another feature of the head and shoulder pattern is to provide a potential target using the measured move technique. The theory is that once completed, the bearish formation should lead to a downward move of at least the distance travelled from the top of the head to the neckline. In our current U.S. Dollar Index scenario, the rule gives us a target of 72 in the not too distant future, and a retest of the all-time low.

    Technical analysis and head and shoulder indicators offer no guarantees, but when coupled with overwhelmingly poor fundamentals, they are warnings well worth heeding.

    To keep the size of this article manageable we split out the second part as our next article “Dollar Proofing your Portfolio.”
     



    Disclosure: Long FXA,FXC,FXF,GLD,SLV
    Tags: UDN, FXA, FXC, FXF, GLD, IAU, SLV, Forex
    Oct 07 11:54 AM | Link | Comment!
  • Taming the "Solarcoaster"
    Individual investors who have dabbled with solar stocks know that they are not investments for the faint of heart.

    With stock market volatility jumping sharply this month, the solar sector went from being the largest gainer last month to one of the biggest losers this month. In fact, the Chinese solar stock sub-segment was the worst of all stock market sectors we track, with a one month plunge of 26.9%.

    Under the best of circumstances, the solar industry is still in its early commercial phase, and very immature. Demand fluctuations and geographic shifts, driven in large part by changes in energy policies by key governments, are compounded by self-induced cycles of under-capacity/over-capacity. Global installed solar capacity is increasing at record rates, but even faster price erosion has wreaked havoc with profitability and share prices of the more marginal manufacturers.

    The largest solar market in the world, Germany, is slowing down due to reduced government subsidies and fears about the economic recovery of the Euro zone. With the Euro plunging nearly 20% in the last six months against other currencies (see Euro breaks support below), Chinese and American solar manufacturers have seen their costs increase in Chinese renminbi and U.S. dollars respectively, and their revenue fall in Euro, causing various analysts to slash earnings prospects of the industry group.

    Euro breaks support


    The same scenario repeats itself over and over, as new investors become aware of the sector after some highflying solar stocks hit the top of the charts, they get excited and start pilling in after the shares have already risen 100%, 200% or more. By then the entire sector is extremely overbought and overdue for a correction. That’s when the same investors panic and the bottom falls out.

    There are two critical factors to remember when investing in solar energy:
    1. The global solar market will continue to grow rapidly for years to come
    2. As always, the companies with the highest margins and the best geographic diversification will do better than their peers
    As the chart below shows, solar stock performance can vary widely within the group. Yes, the recent declines have been brutal, with many company shares down 50% or more since the highs. At the bottom of the chart below is SunPower (SPWRA) which is down some 66% from its 52-week high with no bottom in sight. The better positioned companies, as exemplified by Trina Solar (NYSE:TSL), are still up close to 100% from their 52-week lows despite the recent losses. For a short review of the key metrics we like when selecting photovoltaic stocks, read “Picking Solar Energy Winners”.

    Solar stocks performance




    Disclosure: No positions
    May 18 6:26 PM | Link | 2 Comments
  • LXU Gets the Index Boost
    Standard & Poor’s announced today that LSB Industries Inc. (NYSE:LXU) will be added to the S&P SmallCap 600 index, and the shares jumped nearly 10% on the news, making the stock one of the top daily gainers on the New York Stock Exchange today.
     
    New index listing invariably raises the age-old question “Is getting listed on a major stock index good for a company or bad?” The answer is: good. The Index Effect exists, it is positive (the median excess return of S&P 500 additions was 3.8% for the past five years). Read “The Shrinking Index Effect” at Standard & Poor’s for the details of the study.
     
    For us investors in alternative energy stocks, the inclusion of LSB Industries in the prestigious small cap index comes as a confirmation that the geothermal heating and cooling market segment is gaining importance, but also that LSB Industries is a recognized leader in the field. Regardless of any lasting Index Effect on the share price, we like what our analysis of the company fundamentals reveals, and technical indicators make LXU a screaming buy.


    Disclosure: No positions
    May 13 11:22 AM | Link | Comment!
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