Don’t Be Fooled By The US Dollar’s Recent Rally!

Many traders got “spooked” this past week as the dollar rallied (since they had a bearish view overall). Others, think this is a new sign of a re-emergence of the dollar rally.

So what’s the “real deal”? The dollar is in a bear market now. However, ALL bear markets do have rallies higher. This one is no exception.

Why do I believe that the dollar is in a bear market rally right now that will turn downard within the next couple of hundred pips or so on the U.S. Dollar Index? A few reasons…the technicals show a downtrend, plus the sentiment for the dollar is negative and there’s no inflation yet to support rate hikes.

So let’s look at each of these issues in more detail. First we’ll take a look at the chart of the U.S. Dollar Index below.

Short Term: Dollar Bounce could continue; Long Term: Dollar will tank!

You will see from the chart above that the dollar is in a downtrend “any way you want to slice it”. For instance, the major highs are now lower and so are the major lows. The dollar is also trading below BOTH the 50 and 200 Day Simple Moving Averages (bearish sign). The 50 SMA has crossed below the 200 SMA, a further bearish sign.

The Slow Stochastics are almost to “overbought levels” again (bearish sign) and the MACD continues to head lower and most imporantly right now, it registers below its zero line (more bearish signs).

With that said though, the dollar could rally a bit further (as noted by the green line on the chart) before it heads south once again (as noted by the red arrow on the chart).

So that’s the first reason: the downtrend on the charts. There are old Wall St. sayings that say to “never buck the trend”,…the trend is your friend…trade the trend until it ends…etc. These all mean…whichever way the dollar is heading, trade in that direction and assume it continues until it proves to you that the trend has ended by breaking the downtrend. This can be seen by drawing a downtrend line on your chart or by simply seeing the dollar climb above the major moving averages on the chart.

The next reason for the “dollar decline” is that there is no inflation to drive up interest rates yet! Oh there is inflation in the world right now. However, it’s not in America right now. This can be seen by the year over year figures for the CPI (Consumer Price Index) that tracks the cost of goods on the consumer level.

New Zealand, Australia and the U.K. have Inflation! Not the U.S.!

As you can see from the chart above, consumer prices are rising due to inflation in several coutnries (mostly in New Zealand, Australia and the U.K.). There’s even mild inflation in the Euro Zone and Canada. However, you can quickly see where the numbers flip into the negative. This means that consumer prices are actually “back peddling” and are shrinking. This is happening in Japan, Switzerland and the U.S.  So these are places that don’t presently have inflation.

Inflation has to be tackled (eventually) by having high rates (thus rate hikes). So this is why  both Australia and New Zealand have held their rates much higher and it’s also why they may be some of the first to hike rates much sooner than the U.S. will.

Most central banks get very uncomfortable once their inflation tops the 3% level. The U.S. has a ways to go before even getting back to 0% much less inflation growing at 3%.

Since money is attracted to higher yields, it has no reason to desire the greenback right now unless we were to double dip back into a global recession. Aside from that defensive move, there’s no reason to want to buy U.S. dollars when you could be in a country that actuually has growth (shown through a positive GDP) and that has inflation and has higher interest rates: namely, Australia.

The third reason is “sentiment”. The sentiment has recently turned negative in the last couple of months as Obama puts into practices that are horrible for capitalism and growth. The sentiment has also turned negative due to all of the “money printing” that has taken place which dilutes the value of the dollar. Also, the sentiment has turned negative due to all of the debt that the U.S. has recently racked up.

On top of all of these worries, other countries are starting to make some changes to account for all of the troubles the U.S. is having. China, for instance, has started to buy commodities and commodity mining/exporting companies as a way to diversify their (almost) $2 trillon of dollar reserves which are declining in value.

Both Russia and Brazil bought $20 billion in International Monetary Authority (IMF) bonds recently as a way to diversify some of their reserves away from the dollar.

Also, Brazil and China are now doing some trade in yuan rather than dollars. China and Russia just inked a deal to where they will do some bilateral trading in rubles and yuan rather than using the dollar.

Russia is also working on a deal with China to where China will buy oil in rubles and not dollars.

While all of this takes time to put into action, the negative sentiment from it starts immediately!

Meanwhile, over the next 20 years, it’s anticipated that China will need approximately $100 billion worth of oil during that time. However, if they don’t buy it in “dollars” and choose another currency like rubles, then the dollar will fall even further.

All three of these points, point to a “dollar negative” bias. Thus, traders would be better off buying AUD/USD, NZD/USD and GBP/USD on big pull backs as a way to circumvent the fall of the dollar.

AUD/USD: likely a buy after this pull back!

U.S. consumers really need a “dollar hedge” such as these pairs so that as costs go up eventually, due to the fall of the dollar, they will have gains in their currency accounts that help to offset these rising costs. Otherwise, the money you make will erode in value and won’t go nearly as far as it used to.

Despite Near-Term Issues, Abercrombie & Fitch Remains Focused On Long Term

More consumers are trading down to cheaper alternatives on everything from food to staples to apparel, and many continue to avoid buying premium brands. In response, several retailers are lowering prices or shifting merchandise to capture sales from those customers seeking merchandise with lower price points.

This environment has been especially difficult on Abercrombie & Fitch (ANF: 26.01 -0.48 -1.81%), which is well-known for its premium fashion brands. The specialty retailer is routinely reporting monthly same-store sales in the -20% area. A big reason for the company’s weak results is that management refuses to chase its competitors down the path of lower prices. Abercrombie remains committed to protecting its premium brands while it waits for industry conditions to improve.

Management has acknowledged that the recession could continue to hurt the retailer’s results in the months ahead, but don’t look for the retailer to change its pricing strategy. Instead, management plans to survive the difficult economic environment through expense management, seasonal clearance events, and a fewer new store openings. That strategy includes closing poor-performing stores such as its RUEHL stores, all of which are going to be closed by year end.

We note that after announcing that it was going exit the RUEHL business, Abercrombie amended its existing credit agreements to exclude charges associated with exiting the RUEHL business. Management believes these operational efforts will enable the company to better protect its existing brands and end the year with a strong cash position.

We’ve been writing about consumers becoming more frugal for some time, and we continue to believe that this attitude will stay with American consumers even after the recession finally ends. That being said, we applaud Abercrombie’s decision to focus on long-term success. Too many companies get caught up in managing their business for short term, but that usually comes at the expense of long-term growth.

The retailer’s focus on the long term should position its stores to benefit when consumers finally return to shopping for premium brands. Even so, Abercrombie is likely to struggle for the next few quarters as the consumer is still a long way from paying up for premium brands.

As such, ANF shares don’t look too attractive right now. However, for those investors looking beyond the next 12 to 18 months, Abercrombie & Fitch is a retailer that should deserves a closer look.

Gann Chart Art In The 10 Year Yields

I thought I’d try an experiment with the 10-Year Treasury Yields Long-Term Chart and apply a little Gann analysis in terms of squaring price and time to see what the result might be.

Here’s the “chart art” from my experiment which probably should be filed under “Interesting” as opposed to “Actionable.”

Ten-Year Treasury Yield “Chart Art”

(Click for Full-Size Image)

One of my clients calls this my “Mad Scientist” type experiements when I’m ‘cooking up’ new ideas or applying the deeper level technical tools such as Gann and Fibonacci, many times of which I don’t share publicly on the blog but I thought some readers might find this interesting.

I started with the orignal square on the left which comes off a secondary swing low (that’s important in Gann terms) and then squared the time and price by drawing in the diagonals to achieve a perfect square.

From that original ’seed’ (the move from 1965 to 1980 - 15 years) I then simply copied and pasted both the square and the diagonals to get the three resulting squares and subdivisions.

We’re most interested in seeing what happens when price comes into one of these ‘nodes’ or lines to see what happens in terms of support or resistance.

I highlighted some of the moments when price inflected off of these nodes - which still appears to me to be magic.

What gets me is that it called the exact top, in terms of doubling the square to the upside.  Price then retraced back to bounce off the bottom of the same square (around the 1980 to 1985 period) and then failed at the descending line.

We then found key support at the midpoint of the middle box in 1986 and then later the lower box in 1997.

If we’re trying to apply current analysis, it would seem that the 44.50 (which is 4.50% yield) could be a significant area to overcome… or perhaps we’re completely in a new square at the moment.

For those worried I’ll be changing my style - I won’t.  This is a test - this was only a test/experiment.

If there’s any Gann enthusiast readers, feel free to comment or contact me  - I’m a Gann neophyte but I find the geometrics very interesting.

The Wall Street Clown Show

It’s been a while since I laughed out loud while going through the news, but that’s just what happened when I read the following Reuters report, “JPMorgan’s Lee Sees S&P 500 Retest of ‘07 Record.” As a service to loyal Financial Armageddon visitors, I thought I’d do them the favor by highlighting all the ridiculous bits:

The benchmark S&P 500 index should surge back to its October 2007 record above 1,500 by the end of 2012, provided the U.S. economy sees a V-shaped recovery, JPMorgan Chase Chief U.S. Equity Strategist Thomas Lee said on Wednesday.

My take: And I should be the next president of the United States, provided I have enough write-in votes when the 2012 election results are tallied. In reality, the notion of V-shaped recoveries — especially after what we’ve been through — is one of Wall Street’s favorite (unfulfilled) fantasies. Otherwise, for reality-based insights on the impact of financial meltdowns, read “The Aftermath of Financial Crises,” by professors Carmen Reinhart and Keneth Rogoff).

“The global economy is in the midst of a synchronized recovery,” Lee said at the Reuters Investment Outlook Summit. “If we end up with a V-shaped recovery, we could go back to our record high of 1,500 in 2011-2012,” he added, referring to the S&P 500.

The S&P 500 fell 0.4 percent to 908 on Wednesday.

My take: “Synchronized recovery”? Say what?! Not according to data published just weeks ago by economics professors Barry Eichengreen and Kevin O’Rourke, in a post at voxEU.org entitled, “A Tale of Two Depressions.” Below is just one of their highly illuminating graphs (no sign of a rebound here, that’s for sure):

Lee also reiterated his year-end 2009 target of 1,100 for the S&P 500, saying the United States will likely come out of its recession some time this summer, followed by the rest of the developed world.

In October 2007, the S&P 500 hit a record closing high of 1,565.15, before falling back. In March of this year, it slumped to a 12-year closing low, but has since rebounded by about 40 percent on hopes the recession that begun in December 2007 was moderating.

My take: In March 2008, Lee was counting on a “short recession,” had penciled in a year-end price target of 1450 for the S&P 500, and was expecting “financials to lead the market higher,” according to CNBC. So far, at least, there’s no real sign that this allegedly “brief” downturn has ended, and anyone who bet on the JPMorgan “strategist’s” prior call on U.S. equities managed to lose his or her shirt last year, because the broad market finished down 38% at 903.25, while the S&P Financials regurgitated more than half their value.

Lee added that a market correction in the wake of the recent run-up would be “healthy,” and could lure back investors who opted to sit out the recent rally.

“This rally has left many investors uninvested or underinvested. The pullback is the entry point to really see more meaningful money put to work,” said Lee, who has been named a top analyst in Institutional Investor magazine’s annual all-star poll.

My take: not content to lead the lambs to the slaughter like he did last year, Lee is determined to fully eviscerate his followers without any real justification other than a reliance on the greater fool theory. Otherwise, in an interesting Freudian slip, Lee more-or-less acknowledges that the recent “green shoots” rally has not had much in the way of “meaningful money” behind it.

He favors the financials, industrials, technology and consumer discretionaries sectors, in that order, saying the sectors would be the biggest beneficiaries of an economic recovery.

Within financials, he favors asset managers.

The S&P financial index is up 84 percent since the broader market’s 12-year low on March 9.

“We are still favoring cyclicals over defensives,” said Lee. Even so, he was mindful of potential risks to the recovery.

“The biggest risk is that we’re implicitly assuming the consumer is stabilizing. There’s a lot of potential shocks. If oil goes to $100 a barrel, you can’t have a recovery,” said Lee, adding the other risk would be if savings rates somehow overshoot.

My take: even though reports clearly indicate that consumers are terrified about the future and are continuing to scale back, the housing market remains in the doldrums (or in the tank, depending on where you live), and personal consumption rates, savings rates, and debt levels are still on the wrong side of long-term averages, Mr. Lee assumes “the consumer is stabilizing.” Why stop there? As long as we’re talking BS, why not go a step further and “assume” that the consumer is flush with cash and starting to spend money like a drunken sailor?

One would have thought that after having been SOOOOO wrong about the events of the past two years, those who call themselves “strategists” would have sought out a more productive line of work.

Instead, all we keep seeing are endless reruns of the Wall Street Clown Show.

Stay tuned for plenty more?

 

Boeing And The USAF Tanker Program: The Plot Thickens

Boeing (BA: 48.44 -0.52 -1.06%) apparently is considering proposing on the upcoming USAF Tanker Program re-bid with versions of two of its models — the 767 and the 777 — in the hopes that one of them will be selected over the single Northrop Grumman (NOC: 47.11 -0.26 -0.55%)/Airbus A330-based submittal. The following is provided for those of you interested in the specifications — and the differences — between the three aircraft (for the Boeing 777-based version, we have used data for the 777 Freighter as being probably closest to the final configuration):

In case you’ve forgotten, the current KC-767 has no cargo capacity, as it is solely an aerial-refueling tanker, which is what Boeing may have thought USAF wanted during the last tanker tussle. Instead, USAF picked a version of the A330 MRTT — an aircraft with cargo capability — which means it can also be configured as a troop carrier, which may be one of the reasons USAF doesn’t want any more C-17s.

It’s all becoming clearer now: if you’re not going to buy KC-767s and you’re not going to procure more C-17s, the least USAF can do is buy KC-777s. Not only that, but Boeing reportedly is thinking about producing the KC-777 aerial tanker in Everett, which would make most of us living in Western Washington State a bit happier than even the last thirty days without rain have done.

If you take a look at the specifications, you will notice that the A330 MRTT is sandwiched in between the KC-767 and KC-777. However, if USAF wants a multipurpose aircraft with the most capability, the KC-777 is quite possibly the aircraft of choice.

In any event, the re-bid is a happening thing, and we may soon know if U.S. commercial aircraft production will continue to be centered in the Pacific Northwest or will begin to shift to the Gulf Coast — for if the A330 MRTT wins, it will be completed in Mobile, Alabama…and once Airbus has a toe-hold in the USA, there’s no telling what comes next.

Incidentally, USAF’s version of the A330 MRTT was ultimately dubbed the KC-45, so as to not confuse it with anyone else’s A330 MRTT tankers.

Let the bidding begin!

Some Preliminary Thoughts On Regulatory Reform

Increased Powers for the Fed

The rhetoric so far is exaggerating the extent of new powers for the Fed. Since the major investment banks converted to bank holding companies (BHC), the Fed already is the primary regulator, at the BHC level, of the largest financial institutions. Nonbanks like AIG  would represent some expansion, but even that was taken on last year on an emergency basis.

A New Consumer Protection Agency

If I were still president of the Dallas Fed, I’d be happy to lose this function for selfish reasons. Consumer “advocates” are very aggressive and often abusive in their approach. Good riddance!

For the good of the country, however, putting this function into a specialized agency that doesn’t have other responsibilities that bring balance into the picture is a bad idea. Over time these advocates will find themselves pushing on an open door, and the agency itself will become an advocate of proposals that appear consumer friendly on the surface, but will likely have adverse unintended consequences for consumers.

Abolishing the Office of Thrift Supervision

This isn’t necessary on quality grounds. They do as good a job as the bank regulators. Hopefully, their personnel can be folded into the new banking agency.

The elimination of the federal thrift charter may be a good idea. Thrifts are currently prevented by their charters from diversifying sufficiently out of real estate lending. Morphing them into banks will make them safer.

More to come later.

 

General Electric Looking Better And Better

As the details of yesterday’s shareholder meeting at General Electric (GE: 12.10 +0.13 +1.09%) hit newsstands, we are left with the impression that GE is looking better and better as an investment.

Yes, shareholders were pretty livid about the dividend cut and the amount of CEO Jeff Immelt’s compensation. Yes, earnings have dropped 35% and GE has a number of divisions like it’s entertainment and financing units that have performed poorly. And yes, there was even talk of breaking up GE into smaller companies.

But it’s all a smokescreen.

GE is looking better considering its size, and markets that it serves. In fact, earnings actually beat forecasts. Yes, forecasts were low - but again who cares, earnings forecasts have all been guesswork anyways over the last few quarters.

After the dotcom bust, GE shares were cut in half. Since its high of over $41 in 2007, the share price has plummeted even worse, over seventy percent. But it’ll come back.

GE is looking better as one of the broadest reaching companies producing some of the most complicated products on the planet. From engines to turbines to power plants, GE has made itself a player across almost all sectors and most countries.

We’ve talked before about how GE is closer to a mutual fund than a single stock, but the truth of the matter is that GE will emerge from this recession as it has from past ones - just as strong. Picking up some GE stock at below $15 is about the clearest long-term value play we can think of.

California Tax-Free Bonds Are Still A Great Buy

Too big to fail. That’s getting to be a weekly headline here in the States. The big economy in the quote above is the state of California’s. In case you didn’t realize, California by itself would make for the world’s eighth-largest economy.

Things are crazy out there. The state faces a $24 billion budget shortfall… and big tax hikes ahead. Nevada, Florida, and Arizona are in the same shape.

You might think all this budget trouble means it’s a bad time to loan money to these guys. But I’m actually urging readers of my Retirement Millionaire advisory to keep on loaning money to states - to keep buying “municipal bonds.”

Understanding “muni bonds” is simple. In order to fund things like highway projects and water systems, states borrow money from individual investors. To entice folks to invest with the government, interest earned on these bonds is exempt from federal taxation.

That means if California’s muni bonds are paying out 6%-7% in interest payments, it’s the equivalent of getting a 9%-10% yield on any other kind of interest-bearing investment. You also have the extraordinary power of the government looking out for you. The alternative to you not getting paid is for the state or city to go bankrupt.

Right now, though, investors are scared of muni bonds. You see, back in 1975 and 1978, New York City and Cleveland defaulted on their debt. People are worried that’s going to happen again.

But folks are missing a big thing here: If Washington D.C. isn’t going to let GM, AIG, or Citibank go belly-up, do you really think they’ll let a big state go bankrupt? I’m not in favor of any bailout, but that’s the game we’re playing.

My favorite way to own muni bonds is through “closed-end funds.” These investment vehicles aren’t like regular mutual funds… They can trade for premiums and discounts when investor sentiment gets out of whack. Oftentimes, you can use closed-end funds to buy a dollar’s worth of assets for 85 or 90 cents.

And that’s where the opportunity is today: closed-end muni-bond funds that are trading for much less than their “net asset value.” Right now, we can buy several closed-end California municipal funds for as cheap as 84 cents for every dollar of assets.

Consider the last two times the markets did this. In 1995, you could buy $1 of muni bonds for 85 cents. And in 1999, a dollar’s worth of these bonds cost 86 cents. The chart below of MCA (a BlackRock fund of California munis) shows these extremes. Every time the gray line dropped below the black one, you could buy munis at a discount.

Buying Munis at a Discount Leads to Big Gains

As you can see, buying when the fund traded at a discount led to capital gains within a couple years. Not to mention the tax-free income along the way.

The state of California is in trouble. The price (low) and yields (high) of its municipal bonds show it. But you can be sure Obama and the current federal government will not let the state slide into the ocean and default on its obligations to investors. This provides us with an incredible opportunity to buy high-yielding discounted municipal paper.

A lot of closed-end funds own nothing but California bonds, including MCA. If you’re a real contrarian, consider buying these. Many are going for double-digit discounts.

If you want a safer bet, take a look at more diversified funds that own bonds issued by many different states.

Bottom line: Don’t get scared out of these tax-advantaged bonds. They’re still a good source of income at arm’s reach from the taxman.

Here’s to our health, wealth, and a great retirement.