US Dollar Approaches 200-Day Moving Average

Trading is, as you know, an inexact science. So while we *think* it's likely that the dollar has put in a major bottom, a cross above its 200-day moving average would significantly reinforce this hypothesis.

The dollar tests it's 200 day MA. (Source: WSJ.com)

We're not there yet, but we're getting close. A push above 79.5 would indicate that you should, at the least, not be short the dollar.

Being long an asset that's trading above it's 200 day MA, and short one that's trading below, is usually advisable. And ironically, this rule is so simple and reliable that many traders usually ignore it - myself included!

Buying Cheap Put Options While Volatility Is Low

In today's Growth Stock Wire, trader extraordinaire Jeff Clark takes a look at the use of Bollinger Bands in making trading decisions.

Bollinger Bands don't tell you which direction the stock is headed, but as the bands pinch closer together, they're warning a large move is on the way.

This is the best time to be a buyer of options. Call and put options are relatively cheap because the implied volatility is so low.

As volatility expands, the stock is using up the stored energy. When the Bollinger Bands spread abnormally far apart, they're warning the stock is headed for a period of consolidation.

Today, Clark points out, the market's Bollinger Bands are as tight as they've been all year. Which makes sense, as the broader market has been range trading for quite a bit.

So, the next move may be a very sharp one. It may not be a bad time to pick up some cheap puts.

Jim Grant's Early Dollar Requiem; Bob Prechter on Munis; Dollar Turns Up

On December 5th, I bookmarked Jim Grant's Op Ed for the Wall Street Journal entitled Requiem for the Dollar. I had meant to blog about it, but got busy, and it actually worked out for the best, as we now have 15 days of trading hindsight since the op ed was published.

I should first do the obligatory expression about how I think the world of Jim Grant (I actually do). He's a great investment mind, and a truly eloquent writer. But this is a good lesson on why you should always read the financial news with a skeptical eye, no matter how convincing the argument for one scenario or another will be.

As you can tell by the title of Grant's piece, he's not enthralled with the buck's prospects, and kicks off the article with some ominous lyrics:

After a glorious run,

Has the greenback become

The General Motors of currencies,

Hobbled by bad management?

I personally agree with all of the points Grant makes...save for perhaps the timing of his call.

Ironically, while Grant and fellow WSJ readers were mourning the passing of the dollar, the buck itself was kicking off a megarally:

Somebody forgot to read Grant's article to the US dollar.

(Source: Barchart.com)

Of course, no market goes up or down in a straight line. But perhaps, for the time being, the dollar may already have all the "bad news" priced in.

Another great example of why it's so dangerous to use the news to trade - the news usually lags the price action!

Related reading:

• Tom Dyson also believes the worst cased scenarios are already priced into the market for the dollar.
• In the news/trading action sequence spirit, Vadim Pokhlebkin explores whether or not earnings really drive stock prices.

Stephen Colbert's Investment Portfolio Recommendations

Earlier in the week, the Colbert Report did a fantastic spoof on gold. If you haven't caught it yet, check it out...it's absolutely hysterical!

http://commoditybullmarket.blogspot.com/2009/12/whats-in-stephen-colberts-investment.html

America's Top VC - Uncle Sam?

Come one, come all - entrepreneurs and investors alike - and pitch your business to Uncle Sam, the newest kid on the Venture Capital block!

Please exercise caution when reading this piece, as any free market loving individual may throw up all over himself or herself!

Robert Prechter: Run, Do Not Walk, From Munis

Bob Prechter's latest Elliott Wave Theorist popped into my Inbox Friday afternoon. It's excellent as always, and the good folks at EWI were kind enough to allow us to reprint a portion of Bob's analysis, which you can read here.

Prechter advises readers to run, not walk, from muni bonds...as he thinks local and state governments are toast!

One More Good Jim Rogers Interview

Here's another gem of an interview from Jim Rogers on the Closing Bell with Maria Bartiromo:

http://www.youtube.com/watch?v=4HkbS4aDCU0

Hat tip to The Daily Crux for the tip on this interview. And enjoy the hilarious Tiger Woods quip!

Positions Update - Holding S&P Puts, Waiting for Long Dollar Re-Entry

On Thursday, I took advantage of the market dip to close out both S&P shorts. They had to be closed out or rolled anyway. Both positions were closed at a loss, but I was fortunate to get a down day to sell on.

Still looking for a re-entry point into the dollar trade, which I basically got "margined" out of. I would have preferred to hold the position, rather than time the exit and re-entry, as I believe the trend has now changed (finally).

And I'm still holding the S&P 1050 puts, which continue to shed value. But, I think the risk/reward of holding them here is quite favorable still.

Another strong week for the dollar!

(Source: Barchart.com)

The S&P continues to defy gravity - but its time may be limited, if the dollar has indeed put a bottom in.

(Source: Barchart.com)

Open positions:

Holding 2 January 10 S&P 1050 Puts.

Current Account Value: $19,235.14

Cashed out: $20,000.00
Total value: $39,235.14
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Jeff Clark's Thoughts on How to Predict the Price of Gold

Casey's Jeff Clark shares his observations about where the price of gold may be heading in years to come.

Regular readers know that my opinion differs from Clark's in the short term, as I think gold is in for a massive correction. However I do agree that the most likely medium to long term scenario is a moonshot for gold prices. The real question is when.

***

How to Predict the Price of Gold

Jeff Clark, Editor, Casey’s Gold & Resource Report

Long-term readers know that gold moves inversely to the dollar, meaning if the dollar drops, gold tends to rise (and vice versa). This happens with about 80% regularity. But what many gold writers haven’t acknowledged is the leveraged movement our favorite metal has demonstrated this year to the world’s reserve currency.

The U.S. dollar index, a six-currency gauge of the greenback’s value, has dropped 7.8% so far this year (as of December 3). Meanwhile, gold is up 38.7% year-to-date. In other words, for every 1% drop in the dollar index, gold has risen 4.9%. If that approximate percentage holds over time, one can begin to estimate what the gold price might be if you know what the dollar might do.

While the dollar is likely to bounce at some point, making gold correct, the long-term fate of the dollar has already dried in cement. If the dollar were simply to return to its March 2008 low of 71.30 next year – a 4.6% drop from current levels – this would imply a rise in gold of 22.5% and a price of about $1,478 an ounce.

The long-term scenario is more dramatic. If you believe the dollar will lose half its value from current levels, this would imply a gold price around $4,164. If you believe it will lose 75% of its value, gold would reach about $5,642. Doug Casey has called for a $5,000 gold price; if he’s right, guess what that implies for the dollar?

And think about this: these calculations ignore what else might “show up,” such as when price inflation shows up in the economy, the greater public shows up to buy gold, or the Chinese don’t show up at an auction. Could $5,000 gold be too low?

Unless you think the dollar’s problems are solved, its eventual demise is gold’s eventual glory. Prepare, and invest, accordingly.

Jeff Clark is editor of Casey’s Gold and Resource Report, where each month he brings readers some of the best research and investment recommendations in the business.

Robert Prechter on Why You Should Run From "Safe" Muni Bonds

Our friends at EWI have been kind enough to allow us to republish the following -an excerpt from Robert Prechter's latest Elliott Wave Theorist.

Read on to learn why Prechter advises that you avoid muni bonds at all costs...

Individual Investors Have Jumped Into Another Fire
December 20, 2009

By Robert Prechter, CMT

First they bought into the “stocks for the long run” case and got killed. Then they jumped on the commodity bandwagon and got killed. Many investors are buying back into these very same markets, but others are running to what they perceive as safe “yields” in the municipal bond market. So far this year, individual investors have “poured a record $55 billion” (Bloomberg, 11/12) into muni bond funds, with the pace running $2b. per week in August and September; many other investors are buying munis outright. These must be the people who tell us that they can’t live without “yield” and also cannot imagine their city, county or state government going bust. But as Conquer the Crash warned and as The Elliott Wave Theorist has reiterated, the muni bond market is heading for disaster.

Municipalities have borrowed more than they can repay, they have pension liabilities that they cannot meet (up to a trillion dollars’ worth, according to Moody’s), and tax receipts are falling. The only reason that states haven’t failed yet is the so-called “stimulus package,” which took money from savers, investors and taxpayers—thereby impoverishing the people who live in the various states—and gave it to state governments to spend so they would not have to cease their profligate spending. But political pressures will eventually cut off this gravy train. In the 2010-2017 period, the muni bond market will become awash in defaults. The leap in optimism since March, which has shown up in every financial market, has fueled a retreat in muni bond yields to their lowest level since 1967 and narrowed the spread between muni bond yields and Treasuries.

This rush to buy municipal bonds is occurring right on the cusp of a dramatic decline in their values. While many individuals are loading up right at the peak so they can participate in the next major market disaster, smarter investors, such as insurance companies Allstate and Guardian Life, are getting out. Subscribers to our services, we trust, own not a single municipal IOU. Our recommendation for investors is 100 percent safety, and such a program does not include muni bonds. If you are a recent subscriber, please read the second half of Conquer the Crash as a manual on how to get your finances safe.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now! You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons here.

Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

America's Hottest Venture Capitalist: Uncle Sam?!

In a story that will make any red-blooded capitalist, the Wall Street Journal reports that business are flocking to seek cash "from the biggest venture capitalist of them all, the US government."

The DOE hopes to lend or give out more than $40 billion to businesses working on "clean technology," everything from electric cars and novel batteries to wind turbines and solar panels. In the first nine months of 2009, the DOE doled out $13 billion in loans and grants to such firms. By contrast, venture-capital firms -- which have long been the chief funders of fledgling tech firms, taking equity stakes in the start-ups that will pay off if they go public -- poured just $2.68 billion into the sector in that time, according to data tracker Cleantech Group.

Thus, while much attention has been focused on the federal government's involvement in banking, Washington also is gaining sway in another swath of the economy. By financing clean-tech ventures on a large scale, the government has become a kingmaker in one of technology's hottest sectors.

So what's wrong with a little help from Uncle Sam?

Some young companies are tailoring their business plans to win DOE cash. Private investors, meanwhile, are often pulling back, waiting to see which projects the government blesses. Success in winning federal funds can attract a flood of private capital, companies say, while conversely, bad luck in Washington can sour their chances with private investors. The result is an intertwining of public and private-sector interests in an arena where politics is never far from the surface.

So there are unintended consequences from government mettling? You don't say!

Stories like this should scare the crap out of anyone who honestly believes the economy is improving. Stuff like this is bad business practices, bad morality - it's bad, bad, bad.

Anyone remember how the USSR's experiment with central economic planning worked out?

I want you! Actually it's your business I want...and on my terms!

What's in Stephen Colbert's Investment Portfolio Right Now? The Answer May Suprise You

This clip from The Colbert Report is absolutely hysterical, as Stephen Colbert introduces somewhat contrarian investment portfolio recommendations from "Prescott Financial". Enjoy!

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Prescott Financial Sells Gold, Women & Sheep
www.colbertnation.com
Colbert Report Full Episodes Political Humor Economy

Trader Vic: The Best Trading Book You've Never Heard Of

A few months back a friend mentioned an obscure trading book to me, citing it as one of the best trading books he's ever read, despite the fact that very few people have ever heard of it. Since this guy is a top notch trader in his own right, I made a mental note to add this book to my reading list.

This weekend I read Trader Vic: Methods of a Wall Street Master cover to cover, and have to agree it's a fantastic read - one that I think our regular readers will definitely enjoy. It's authored by legendary trader Victor Sperandeo, who tells all for 260 pages. Think of the insight contained in each interview in Market Wizards: Interviews with Top Traders, but in even more detail.

Sperandeo categorizes market participants into three basic types:

1. Traders, who focus their activity on the intraday and/or short term trend
2. Speculators, who focus on the intermediate trend, taking market positions and holding them for weeks to months
3. Investors, who deal mainly with the long term trend, and hold their positions from months to years

He identifies himself as primarily a speculator, but one who plays all three trends, which he jokes might make him a "speculative trader who also invests."

What I found so great about this book is that Vic does not hold up any one theory or technique as holding the secret to investment success. On the contrary, he cites this as the flaw of most investment books - so, he set out to write one that would combine technical and fundamental analysis, with a healthy sprinkling of probabilities and risk management.

The key takeaway is that investing/trading is a game of probabilities. Your goal, as a market participant, is to maximize your probability of success on each trade, while simultaneously optimizing your risk/reward on that trade.

For much of the book, Sperandeo shares, chapter by chapter, the considerations he uses when placing his positions. He holds Dow Theory in very high regards, using it as a strong guide (but never an absolute indicator). He also uses basic technical analysis, saying its greatest value is that it "provides a method of measuring the tendency of the market to react in a particular way under similar conditions throughout history."

He does not rely on complex technical analysis though, and instead pokes fun at the die hard practitioners. Fellow fans of Elliott Wave Analysis may be a little disappointed that Vic does not regard it as particularly useful.

However Vic has no shortage of additional insights to share that compliment his use of basic technical analysis. He discusses how he identifies a change of trend, which he believes is "the fastest and most risk-free way to make money in the markets." He shows you how to draw and trendline and make use of moving averages and oscillators - again for framing your trading decisions, and not as an absolute guarantee of success.

As most astute traders seem to be, Sperandeo has deep rooted libertarian views. He is not a fan of Keynesian Economics (to put it lightly), and properly lambastes this school of thought for the fraud that it is...ending by basically saying that this is all going to end very badly.

Last but certainly not least, the second portion of the book is dedicated to helping you get your mental and emotional house in order. Vic says that out of 38 people he trained in the 1980s, only 5 made money and went on to pursue their own careers as traders?

Why such a low success rate? He cites the difference between success and failure in trading as "neither intelligence or knowledge to trade, but the will to execute knowledge."

In other words, the unsuccessful traders were not so because they lacked knowledge - it was because they couldn't keep their heads about them and stay disciplined in the heat of the moment!

This discussion of personal discipline and beliefs is very valuable, and similar in flavor as what Van Tharp advises and schools traders on.

In summary, whether you are primarily a trader, specular, or investor, Trader Vic: Methods of a Wall Street Master is a fun and enlightening read. I'd highly recommend you add it to your reading list.

What Does Trader Vic See Ahead for 2010?

The one thought that kept floating through my head while reading Trader Vic was: "Man, I'd love to hear what this guy is thinking today!"

Well, as luck would have it, our friends over at Hard Assets Investor just caught up with Trader Vic last week!

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Which commodities do you think are going to do well next year?

Victor Sperandeo, "Trader Vic" (Sperandeo): Well, I'm on record across the world as saying that gold is the best investment in the world for the next two to three years. It's fundamentally obvious, but when you're printing huge amounts of paper vs. something that is considered money, the paper will depreciate and the hard assets will go up. So gold and silver will do well—silver a little less so—but gold certainly.

Even when it was about $830-$850/oz, I basically said, "I don't see any scenario where it can come down." But I wouldn't say that it can't correct at any given moment. When the Fed decides to raise interest rates, at that point, gold will sell off. It will be a steep correction.

But it's also a buying opportunity, because if they raise rates, it would only be to try to stabilize the dollar. But it wouldn't affect the kinds of huge deficits and the printing of money that's going on for the next 10 years. It's unsustainable. So gold, that's my most favorite, if you will.

Read the rest of HAI's interview with Trader Vic here.

The Latest At-Home Party Craze: Gold Selling

So is the gold market getting overheated, or not? The opinions on both sides sure are polarized.

Some, like our pal Trader Vic, insist this isn't a gold bubble. I was listening to the Financial Sense Newshour yesterday, and they agreed, saying we're not even close to the mania stage yet.

On the other hand, our local rag, the Sacramento Bee, reports that "the latest at-home party craze is gold selling."

Move over, Tupperware, candles and kitchenware.

The latest at-home party craze is gold selling.

Whether spurred by cash-strapped consumers or the alluring jump in gold prices, the concept is enticingly simple: Bring your tangled chains, broken bracelets, outdated earrings or a hoop that's lost its mate. Even dental fillings or an ex-boyfriend's heart-shaped pendant. Your stash of unwanted gold is tested, weighed and traded on the spot. For cash.

And with gold briefly sweeping past the $1,200-an-ounce mark in recent weeks, it's becoming an even more tantalizing invitation. Here and across the country, it seems, old gold is turning into green.

If not a bubble, then we're at least overdue for the current correction, which we're about $100 into so far. And surprise, surprise - look at the gold bull that predicted this correction a few weeks back...our hero, Jim Rogers...

Correction: We're Not Trading Against Jim Rogers After All

On Sunday, I mused that one of my deepest concerns about being bullish on the US Dollar is that I'm on the opposite side of the trade from Jim Rogers, who thinks the buck is doomed.

Not so, pointed out astute reader Sibbie via email, citing a recent Rogers interview in BusinessWeek:

Q: How much of the runup is being driven by U.S. deficits and the weakening dollar?

Jim Rogers: A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.

Nice find, Sibbie, thank you!

You can read the rest of Jim Rogers' interview with Maria "Money Honey 1.0" Bartiromo here.

Positions Update - Still Really Short the S&P, Had to Roll the Dollar Contract

On Friday I had to roll my dollar contract, and then realized I didn't have enough margin to buy back in...oops! So I'm still holding the S&P shorts and puts, and am waiting for a re-entry point on the long dollar side.

We had a nice week of gains on the dollar, and we may be due for a short-term pullback, so I'll wait patiently, and hope for the S&P breakdown that we've been waiting for.

What's reassuring is that nobody seems to be a believer that this is the start of a dollar rally. That's just the way we like it.

A strong week for the dollar - looks like the bottom may finally be in place.

(Source: Barchart.com)

The S&P continues to defy gravity - but its time may be limited, if the dollar has indeed put a bottom in.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $18,304.68

Cashed out: $20,000.00
Total value: $38,304.68
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Jim Rogers is Buying...US Dollars???

On Sunday, I mused that one of my deepest concerns about being bullish on the US Dollar is that I'm on the opposite side of the trade from Jim Rogers, who thinks the buck is doomed.

Not so, pointed out astute reader Sibbie via email, citing a recent Rogers interview in BusinessWeek:

Q: How much of the runup is being driven by U.S. deficits and the weakening dollar?

Jim Rogers: A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.

Nice find, Sibbie, thank you!

You can read the rest of Jim Rogers' interview with Maria "Money Honey 1.0" Bartiromo here.

Just to clarify my position - I also believe we're heading for higher inflation...just a little later than many pundits think, because we have some massive deflationary forces to work through in the short term. Here's my take on inflation/deflation in the near term.

Related reading: Jim Rogers' latest thoughts on Commodities, Treasuries, and the Economy

Gold CAN Still Go Down; Trading Against Jim Rogers and Richard Russell; Worst Case Scenarios Already "Priced In"

So Gold CAN Still Go Down, After All

Last week was shaping up to be another banner one for gold, as the old relic kept on climbing, day after day...that is, until it stopped.

Gold's one-way rise experienced a sharp setback on Friday, dropping nearly $50 on the day, and over $60 in intraday measures.

Friday was the biggest down day for gold in some time.

(Source: Barchart.com)

Perhaps related, perhaps not, The Financial Times reported on Wednesday that China is wary of the danger of a gold "bubble" (hat tip to my good friend and regular reader Super Joe for sending this link along).

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

China's ever-increasing interest has spawned the popular gold bull theory that the Chinese have established a "$1,000 floor" price for the metal. In other words, with the Chinese buying up more gold on the dips, one needn't worry about the possibility of gold ever dipping down to triple-digit territory ever again.

The only problem with theories like this is that, however sound they may appear, they are usually wrong. The market takes great delight in squashing "absolute" myths and theories, and I suspect this one will be no different.

But - you may interject - with the government printing money like it's going out of style, won't that result in rising price inflation, and rising gold prices? It sure may - I just suspect that it will take longer than most investors anticipate, thanks to the massive amounts of credit that will be written off in the coming years, resulting in some wicked near-term debt deflation.

Trading Against Our Hero, Jim Rogers

Anytime you find yourself on the other side of the trade from Jim Rogers, you probably want to seriously reconsider your position.

That's where we find ourselves now, though, with Rogers continuing to reiterate his distaste for the dollar. To be honest, I don't like the dollar fundamentally either, but believe that paradoxically, it's due to rise in the near term because of its inherent flaws.

In other words, I agree with everything Rogers says, except for his timing. We'll see who's right - I wouldn't blame you one bit for siding with Rogers - but I'm sticking to my guns on this one...at least for now.

And...Richard Russell, While We're At It

The Great Richard Russell believes that gold is going to move higher, no matter what happens, according to The Daily Crux.

Question -- What would it mean if Industrials and Transports broke out to joint new highs?

Answer -- I think it would mean that the Bernanke Fed was beginning to win the war against deflation, and assets were once more beginning to inflate. In that case, gold should move higher.

Question -- What would it mean if this advance topped out, and the bear market was taking over again?

Answer -- I think it would mean that the Fed had lost its battle against inflation. If that was the case, I believe the Fed would spend even more, there would be even more stimulus programs and interest rates would remain at zero "for the duration." In that case, gold should move higher.

(Source: The Daily Crux)

Well I hate to trade against Russell too - a true legend. But, the dollar bull/gold bear camp is so deserted, that I guess it just comes with the territory that our favorite investors will be on the other side of the trade...because there are so few on our side!

Why Worst Case Scenarios are Already "Priced Into" These Markets

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

Positions Update - Still Really Short the S&P, Long the Dollar

Nothing's changed here - still waiting for the dollar to bottom, and the S&P to top. It's been a maddening wait.

We think the dollar is the lynchpin to the whole equation, and that a dollar bottoming should roughly coincide with a top in the other markets. Friday was an encouraging sign, as the dollar rallied sharply. Has it finally put in a low? We shall see!

The dollar rallied sharply on Friday to end the week - did this mark the start of a mega-rally?

(Source: Barchart.com)

Though this rally appears to be running on fumes, it's still running...at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $17,217.50

Cashed out: $20,000.00
Total value: $37,217.50
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Why the Worst Case Conclusions are Already "Priced Into" the Market

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

So enjoy Tom's bet with his boss (who's another great investor BTW). And if you're interested in subscribing to Tom Dyson's premium service, The 12% Letter, we've arranged for readers here to receive a 6-Month Risk-Free Trial (click here to learn more).

***

Porter Stansberry Is My Patsy
By Tom Dyson

On Friday, I made a bet with my boss...

Porter Stansberry is my boss and a good friend. He's one of my favorite investment analysts in the world. An investor who is not reading his monthly newsletter is flying blind in a rainstorm.

But I have a disagreement with him right now. Porter says the United States government is broke. He says there's no way it'll be able to borrow enough money over the next 12 months to cover its obligations. There's going to be an enormous government cash crunch unless it "prints" the money.

By printing this money, the government is forcing our foreign creditors to make an impossible choice: Stay with the dollar and see 50% or more of your intrinsic value wiped out... or abandon the dollar completely and risk a global crisis.

Whatever happens, Porter says, gold soars hundreds of percent, the dollar spirals toward zero, and the price of government debt erodes.

Last week, I bet Porter he's wrong.

Specifically, I bet him the interest rate on the 10-year Treasury note would be below 4% at this time next year. The interest rate on the 10-year Treasury note is the price the United States government must pay to borrow money over 10 years. If the market thinks the government is broke and can't afford its debt, this interest rate will rise. Porter bet it'll rise above 4% in the next 12 months. I bet it will not.

Look at this chart of the dollar in terms of the Swiss franc. The Swiss franc is the most stable paper currency in the world. As you can see, the dollar has been falling against the Swiss franc for more than 40 years. That's Porter's big trend... and it's down.

But notice the long periods where the dollar rises... despite the big trend. There was a huge bull market from 1979 to 1985, for example, and another one from 1995 to 2001.

That's the thing about markets. They never move in straight lines. They overshoot in one direction and then overshoot on the way back. And the funny thing is, just at the moment when they are most stretched in one direction, investors feel the strongest desire to join the crowd.

Take 1979 as an example. It seemed as if the dollar was about to plummet. There were incredibly compelling arguments for selling the dollar and buying hard assets... as there are today. It just wasn't a good time for selling the dollar.

I actually agree with Porter's conclusions. I just think much of the worst-case conclusions have been "priced into" the market. The financial headlines are full of stories about gold and the dollar... billionaire John Paulson buying gold... the great money manager David Einhorn buying gold... India buying gold... Chinese housewives buying gold... Warren Buffett protecting himself against inflation.

It's a popular thing to do nowadays... nothing like in the early stages of the gold bull market in 2002.

The dollar's already been in a bear market for almost 10 years, and Porter's theory has as much traction as it did in 1979. It's an incredibly compelling argument... but my gut tells me if you bet on inflation now, you're walking into an ambush.

Now just isn't the right time to be placing bets on the end of the dollar. It's the easy trade that feels right. Any great trader will tell you the "hard trade" is always the right trade.

Unless you're a short-term trader or you still don't own any gold bullion, I recommend you avoid making any new investments based on inflation or the dollar's destruction. You'll make far more money on this sort of investment when the dollar is nearing the end of a multiyear bull market... like it was in 2000.

Again... this is a matter of timing. I'm still a gold bull. I still think people should keep 5%-10% of their assets in gold, for wealth insurance... for a way to own "real money."

But I'm making the "hard bet" that interest rates will not soar in the next year. I'm making the hard bet that the dollar with strengthen. And I'm not afraid to hold cash. It's going to grow in value over the next year. And I'm going to enjoy collecting more of it from my patsy, Porter Stansberry.

Ed. Note: Tom Dyson is the author of The 12% Letter, one of my top 5 favorite investment newsletters. To sign up for a risk-free trial, click here.

When the Today Show is Talking About Gold's Rise Due to the Weak Dollar...

You know a top just HAS to be near!

I know I've been early on this call - or wrong (same thing) - for a few months now. But this had to take the cake.

There I was, tying the laces on my sneakers, getting ready to walk my dog Banjo on this crisp, cool 34 degree Sacramento morning. And there they were on the Today show, yucking it up about the rising price of gold!

Here's my re-enactment of the conversation:

***

Gal Who Replaced Katie Couric: And gold continues it's rise this morning. How about that for a Holiday gift!

Token CNBC Money Honey: That's right, gold has climbed past $1200 per ounce, and there appears to be no end in sight!

Gal Who Replaced Katie Couric: What's driving gold's rise?

Token CNBC Money Honey: Well it's really being driven by the weak dollar.

Me: Agh!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

***

Look - the dollar is not GOING to crash - it has ALREADY crashed!

To paraphrase Bruce Springsteen - the dollar's been going down, down, down since 2002.

(Source: Barchart.com)

The Today Show/CNBC failed to mention that despite all of the pessimism on the dollar, it has still not dropped below it's 2007 levels. A breach of which, by the way, would cause me to scream Uncle and admit I was wrong.

But when Matt Lauer & Co jump on the rising gold/falling dollar trade, one would have to believe that this trade is pretty well played out. In fact, I see that gold and stocks are retreating since I saw the TV clip. How poetic would it be if gold topped on the exact day of this clip?

Dubai's Meltdown; Liquidity Flows Make the Markets; S&P Fair Value

Dubai's Meltdown

The Thanksgiving holiday is traditionally a very slow time for the markets...not so this year! Dubai rocked the financial world with its announcement to debtors that it needed a bit more time to make good on outstanding debt payments.

Uh oh - here we go again?

Global markets reacted quite violently to the news, throwing up with the vigor of a hungover Wet Wednesday reveler. The real news here is not Dubai in and of itself - a debt bender from a pretty small country can't do that much damage alone to the global financial system. But, if this is a harbinger of more sovereign defaults to come, then now may be the time to beat the Holiday investor crowd and check into the debt rehab clinic!

Is fear back in the markets? It's been a bear market in fear since the March lows - perhaps it's time for fear to bounce back. This week will sure be interesting.

What happens if fear bounces back? We've seen this playbook before, as Mr. Market has already given us a sneak preview...

All Markets are Driven by Liquidity Flows

Friday was a classic fear driven day lately, with the dollar rallying, and everything else dropping. This is the "All The Same Markets" theory we've been following closely for most of 2009, originally popularized by one of our favorite gurus, Robert Prechter.

Most people see that the asset markets are interconnected - it's the old reflation/deflation trade. But, why does the dollar move counter to all of these other markets?

The "flight to safety" explanation is a popular one, and I personally think it's as wrong as it is popular.

The reason the dollar rallies is not because it's perceived a safe currency, but paradoxically because it's the sickest one. The reason is that most of the debt in the world is denominated in US dollars. When that debt goes "poof" - that is, the borrower defaults, and the money that once was there ascends up to money heaven - the supply of money goes down.

When liquidity tightens, this debt can go "poof" in a hurry, as we saw during the last leg down of the stock market. This is highly deflationary. And, because most of this debt is denominated in dollars, the supply of US dollars drops, and the value of each remaining dollar goes up.

But Can't the Fed Print Money and Reflate?

Yes, but there are limits to what the Fed can do, at least in the short term. Even an expert money printer like Ben Bernanke has constraints - he's only human, after all.

When you consider the sum of outstanding credit is somewhere in the neighborhood of $50 to $100 trillion (give or take a trillion or ten), it makes the money the Fed has printed so far (a trillion or two) pale in comparison.

Can the Fed inflate eventually? Sure - but probably only after all of this bad debt has been destroyed. This could take a few years, and there will be some wicked asset deflation in the meantime.

(For further reading, check out Terry Coxon's article: When Will Inflation Really Hit Us?)

First Dubai, Then Greece?

Greece is warming up in the on deck circle, as it tests the levels of sovereign debt, writes Ambrose Evans-Pritchard for the Financial Times.

Evans-Pritchard reports that Greece is "disturbingly close to a debt compound spiral," - and the bond vigilantes appear to be circling the wagons.

S&P Fair Value: Lower Than Current Levels

My good friend, regular reader, and private wealth manager Jonathan Lederer put out an excellent quarterly update for his clients last week, in which he analyzed the valuation for the S&P 500.

Jonathan is a very sharp value investor who has the patience and insight to perform excellent valuation analysis on equities. I always benefit greatly from absorbing his research, which is often a great counterbalance to my views.

He's been kind enough to allow me to share his presentation with my readers, which you can view here...I would definitely recommend you spend some time to watch his quarterly update.

Spoiler alert: Jonathan concluded that the market valuations are a bit rich at current levels, which concurs with my thinking and belief that the market risk right now is to the downside.

Positions Update - Still Really Short the S&P, Long the Dollar

And we continue to wait for these trades to go our way...was Dubai the opening shot in the next wave of deflation? The next week should be quite interesting!

Was last week's downtick the bottom for the dollar?

(Source: Barchart.com)

The S&P rallied off it's deep lows on Friday, but still closed down big on the day.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $19,711.95

Cashed out: $20,000.00
Total value: $39,711.95
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

More Signs the Stock Market (and Everything Else) May Finally Be Topping Out

The story of the investing week was the lack of confirmation of the new Dow and S&P highs by the secondary indices. Stock market tops often occur when sectors "peel away" from the up trend one by one, as fewer and fewer asset classes make new highs.

While this is no guarantee of a top, the odds certainly appear to favor a downturn more now than they have at any point since the March lows.

Steve Hochberg of Elliott Wave International was interviewed on the Financial Sense Newshour last Thursday - if you're into technical analysis and indicators, I'd definitely recommend a listen. I read Steve's market updates every Monday, Wednesday, and Friday - this interview will give you a good idea of what he's seeing.

What Markets are Peeling Away?

A lot of the junk that led this bear market bounce is starting to rollover. The poster child may be the banks - for example, the KBW Bank ETF (Ticker: KBE) still sits below its March lows:

Bank stocks rolling over again?

(Chart source: Google Finance)

And what about our favorite leading indicator, the Chinese stock market? Here the bulls may have some hope, as the Shanghai Composite Index looks to be making another run at new 2009 high.

China takes another run at its 2009 highs.

(Source: Yahoo Finance)

The final month of the year should be quite revealing - if the Shanghai Composite does not take out these highs, and instead puts in a "lower high" before turning lower, then it could be "look out below!"

Isn't Gold Signaling That Inflation is Here?

Gold at $1150, ironically, seems to be the "surest one way bet" in the market. I say ironically, because when gold was plunging last year below $800 and even $700, all the news and speculation seemed to be that there was no end to the drop in sight.

Now with gold going up seemingly everyday, there is now a "floor of $1000" below the price of gold, with a host of "fundamental" reasons being cited, such as China instructing its citizens to load up on bullion.

Also the falling dollar is being credited as a reason why gold is destined for $2000 or higher. That may be the case eventually, but for right now, the dollar appears to be bottoming (see chart below). When unrelenting bad news no longer pushes an asset down in price, it's probably set to rally, and that's what we're looking for out of the dollar in the near term.

The most interesting, and potentially damning, thing to me is the fact that, despite gold's spot price sitting over $100 higher from it's previous high in 2008, gold stocks are still below their previous 2008 highs.

Despite all the enthusiasm for gold's prospects, gold stocks have not (yet) taken out their 2008 highs. (Source: Yahoo Finance)

For the record, I do expect gold, and gold stocks, to go higher - eventually. But I think we're in for a huge deflationary wash out before that happens. We shall see, but this popular trade just seems way too obvious, and loved, right now.

Still "All the Same Markets"

It's worth noting that we still haven't seen any markets "decouple". Either everything rallies, and the dollar tanks, or the dollar rallies and everything else tanks. Until further notice, I still believe diversification is a waste of time.

For some background on the "all the same markets" theory, here's a post from earlier in the week.

Positions Update - Really Short the S&P, Long the Dollar

As if I wasn't already massively short the S&P, I also picked up a couple of cheap puts on the S&P at 1050. These puts are slightly profitable, while the futures positions continue to show a loss.

Going forward, I may look to buy more "out of the money" puts on the S&P, as I expect it to be heading to much lower levels.

The dollar still searches for a bottom.

(Source: Barchart.com)

Did the S&P finally put in a top early last week?

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $20,266.95

Cashed out: $20,000.00
Total value: $40,266.95
2009 Returns: Ugh, sick of calculating, too depressing!

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Still All The Same Markets - A Picture Worth a Thousand Charts

This shot says it all - the "all the same markets" hypothesis is still in play.

Why bother with diversification when all the markets move in tandem?

(Source: Barchart.com)

Hat tip to Robert Prechter, who I believe was the first to point out the increasing correlation between every asset class, as far back as 2004. He postulated that the markets were being driven by global liquidity flows:

• When liquidity is plentiful (2004-2007), all the markets rise together, the dollar drops
• When liquidity dries up, the dollar rallies, all markets tank (2008 - early 2009)

Since March, we've seen liquidity increasing, and the dollar dropping - still playing according to script. So I think we have to assume this relationship is still in place, until proven otherwise.

Nothing's Changed - Stocks Topping, Dollar Bottoming

Did the intermediate top in stocks occur earlier this week? We won't know for sure for many months, but it certainly COULD have been.

The rally has been running on fumes for month, yet still moving upwards despite the naysayers (such as myself), as the S&P pushed above the 1100 mark (raise your hand if you expected that when the S&P was bottoming at 667!)

Nevertheless, all good things must come to an end eventually - and while this rally has been an impressive one, it's magnitude has occurred completely within the normal confines of a bear market rally.

A couple of weeks back, we compared the 2009 rally with the 1930 stock market rally, and found a lot of similarities. Of course you can find similarities in anything if you look hard enough, but my point was that whether or not this rally was for real was still "to be determined", as thus far it's done exactly what it was supposed to - make everyone think that it was OK to get back in the waters.

Remember earlier this year when stocks were again "risky"? Not anymore! Every drop is once again a buying opportunity. Which is exactly when things get the most dangerous.

For fellow "armchair stock market technicians", The Daily Reckoning's Eric Fry cited "a very serious negative divergence" pointed out by options expert Jay Shartsis:

"The new Dow highs have not been confirmed by the widely-based Value Line (over 2300 stocks)," Shartsis points out, "and divergences between these two indices have marked important turning points in the market in past years. This divergence, in my opinion, trumps the still bullish sentiment data and calls for a stock thrashing dead ahead.

"Traders should also note that a head-and-shoulders top is building on the Value Line Index," Shartsis continues, "with the right shoulder top lower than that of the left - an extra bearish element. At the current 2,138, the Value Line is about 4% from a new high and it doesn't look like it is headed back to that level any time soon."

Source: The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

What's the script when stocks turn down? The market gave us a sneak preview last year - it's everything else down too, dollar up!

Now may be an interesting time to pick up some cheap put options on the S&P, especially some of the "black swan" variety, in case this downturn has some umph behind it!

Ed. Note: On Sunday we reviewed Financial Reckoning Day Fallout, the latest book by the authors of The Daily Reckoning.