Turn Back the Clock...It's Another "Flight to Safety" Day

Mama said there'd be days like these...though you may have thought they were a thing of the past.

With the DOW dropping 200 points on the day, and commodities down across the board, the "flight to safety" positions stood tall, just as they did during the darkest days of the Great Deleveraging of 2008.

Yes, sadly, the US dollar, Japanese Yen, and long-dated US Treasuries were just about the only "green shoots" on the board today. This screen shot of the currency markets says it all, from Barchart.com:

On massacre days like today, I like to peruse the boards and find the lone bright spots. So was ANYTHING else up, other than these "safety" trades?

Sugar, coffee, and the meats were the lone bright spots for commodities. Sugar seems to have some nice support around 15-cents:

Sugar appears to have some support around 15-cents (Source: Barchart.com).

While coffee and cattle have been really battered of late. Coffee may be trying to find a bottom around 117, while cattle also looks like it's finding some support. Take a look at the long term chart for live cattle...with prices at their lowest levels since 2006, this could be a compelling time to take a look at loading up on some beef:

Cattle may be finding a bottom after a rough past year (Source: Barchart.com).

Why Trend Following is Your Only Hope for Investment Survival

Buy and hold. Stocks for the long run. Diversify. These investment mantras were gospel during the great bull market of the 80s and 90s.

Drinking this Kool-Aid will get you slaughtered today.

There is no freaking way I would "buy and hold" anything right now. Too dangerous. Buy and hold hasn't worked over the past ten years, and it's unlikely to work for the next ten. We're in a secular bear market, and these things take time...usually 15 to 20 years...to run their course.

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View the full INDEX:.SPX-E chart at Wikinvest

Buying and holding the S&P was a crappy trade over the last 10 years.

No doubt, we are in uncharted financial waters right now. Anyone who says they 100% know what's going to happen next is lying, or dilusional.

We've got historic deleveraging taking place, as unprecedented debt levels are slowly paid down. In the meantime, we've got the US government, among others, running the printing presses at full steam, and tossing boatloads of money down rat holes like Government Motors and socialized medicine.

The foundation of the system has been permanently rocked, and stability, or even just the illusion of it, won't be back anytime soon.

With the Fed's printing press (an irresitable force of hyperinflation) battling massive deleveraging (an immovable deflationary object), the crux of any investment thesis today starts with "inflation, or deflation?"

There's no shortage of arguments on both sides, many made by folks much smarter than I. For awhile, I was reading them until my head spun...first I'd read a very well thought out argument on why hyperinflation will win out...then I'd read a perfect counterargument for the deflation case.

So I thought - what the heck can a guy like me do, if these smart dudes can't reach the same conclusion themselves?

Then it hit me - trend following.

If gold and commodities go up - get in those vehicles, because the market is screaming "inflation"! Gold at $1100 could go much, much higher...real, real fast.

On the other hand, gold still has not decisively broken through $1000. It could very well retest it's lows below $700. So if it breaks down below, say, $900 - that's the market telling us that inflation is not in the cards...at least not yet.

Early this week, gold stocks hit a 3-week low...so I sold all of them. And I'll stay out until they once again "break out" to the upside. That's the only way I can see to play these insane markets - buy the breakouts, and follow your stops. It's OK to have a hypothesis, but don't wed yourself to it. If the market says you're wrong...then you probably are!

My friend Brian Hunt (editor-in-chief of The Daily Crux, an excellent investment website) made a great point to me on Friday about investing in China. Nobody knows what's going to happen in China. Some think it's a trainwreck waiting to happen. Others think China will be just fine, still the growth story of the 21st century.

So what's an investor to do? Watch the price of copper, he says. As long as copper's doing fine, that means China's doing fine. Let Dr. Copper show you the way.

To facilitate my trend following strategy, I've pared my investment assets down significantly. I used to own 40-50+ different stocks, a few currencies, a few commodities...if something looked good in one of my many newsletters, I bought it!

Then I learned during the Great Deleveraging of '08 that diversification does not prevent bad things from happening. Overnight, the correlation of almost all assets went to 1, and everything dropped 40% in a matter of 6 months!

Because I believe the inflation/deflation question is the only important one, I only need a few asset classes to play it. That makes trend following much, much easier for an armchair investor like myself - get into positions and back out quickly - no problem.

Remember the market is the judge and jury combined, the final arbiter of your investment decisions. So let's listen to what it's telling us in the turbulent years ahead...after all, the trend is our friend! And this friend may be our only lifeline to investment survival right now.

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How Herbert Hoover Put the "Great" in Great Depression
2. Richard Russell: We're Nearing Gold's Mania Stage
3. Marc Faber on American Economic Policy
4. Jim Rogers' favorite country (surprise: not China!)
5. Chinese students laugh Tim Geithner out of town

Positions Update

Last week in this spot, I mused:

"Nice week but I have to admit – I’m starting to get quite cautious that some of these trends have played out"

It looks like the caution I expressed last week was warranted...commodities got hit hard across the board this week.

I exited all positions on Monday morning, after seeing the rough start to the week - that was enough to chase me out of all positions. On Thursday, I did reinitiate an Australian dollar position, after reading how the Reserve Bank of Australia was working very hard to keep their currency down in the month of May.

Current Account Value: $31,483.93

Cashed out: $20,000.00

Total value: $51,483.93

Weekly return: -6.8%

2009 YTD return: -38.0%

Prior year's results:

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Australia Caught Sandbagging Their Currency

Nice scoop on the Australian dollar from our favorite currency analyst, Everbank's Chuck Butler:

And under the heading of "dirty float"... The Reserve Bank of Australia (RBA) is reported to have sold the most A$'s in the month of May, since February 2004! Now, go back to May and recall the move in A$'s... The currency gained almost 10% in the month... So, the A$ would have gained even more if the RBA had not sold A$1.4 Billion A$'s in the month! I personally think the RBA was just trying to smooth out the trading the A$, which given this information would have been moving up the charts with a bullet in May!

I don't think the RBA would get involved if the move was a slow, general appreciation of the currency... So, I don't look for future intervention to keep the A$ from gaining the ground I believe it will gain rest of this year, as inflation fears grow stronger and stronger...

Chuck said it - these types of inverventions never last - at the end of the day, fundamentals always win out.

Based on this info, I went long the Aussie dollar once again yesterday morning (I had closed my position on Monday, on fear the US dollar was due to rally).

Those sandbaggin' sons of bitches won't get away with this!

Also let me make a quick plug for Chuck's company - they offer bank accounts and CD's denominated in foreign currencies. So if you're really hot to trot on the Aussie, you could open up a CD denominated in A$, and earn interest to boot, while the A$ appreciates - potentially a sweet dea. Here's the link to learn more.

Related reading: Australia Avoids a Recession...For Now

Australia's Avoids Recession...For Now

Technically speaking...Australia is not yet in a recession.

Australia's GDP rose 0.4% in the 1st quarter of 2009 - a strong, strong performance turned in from the Land Down Under...especially as the other major economies in the world continue to circle the bowl.

As long as China's recovery continues - and that could be a big IF once China slows down on the stimulus spending - the Australian economy should benefit. But China's still got a couple bucks in the bank - give or take a few trillion - so right now it's "game on" for the tag team of China and Australia.

And as we discussed earlier today, these factors will continue to underpin this rally in the Australian dollar as well.

More Good News for the Australian Dollar

The rally in the Australian looks poised to continue, as their central bank left interest rates unchanged - which preserves the large yield premium the Aussie still enjoys over most other major currencies.

Here's the breakdown from legendary currency analyst Chuck Butler:

Down Under... The Reserve Bank of Australia (RBA) left rates unchanged (good for them!) and there was some good news for the economy too, so... The A$ has been underpinned, and poised for a renewed attack on the green/peachback! (for new readers, when I say green/peachback I'm talking about the U.S. dollar, who has changed its color to peach and you can't just refer to it as the greenback any longer... At least I can't! HA!)

Australia's Current Account Deficit narrowed in April to A$4.6 Billion, or 5% of GDP... Still too high for my liking, but, with China pushing the envelope on commodities, investors can look beyond just the deficit in Australia, as long as it keeps narrowing, which it has overall in the past year!

The RBA's statement following the meeting was a bit cautious, and leads me to believe they're leaving the door open to a rate cut in the future... I guess they wouldn't be prudent if they just closed the door! So... When this was first announced the A$ took a hit... But has recovered from that initial hit, and like I said above, poised for a renewed attack on the green/peachback...

Yesterday, before this news came out, I decided - what the hell - pyramid time. So I picked up another contract in the morning at around $0.808.

Most of the day this baby was in positive territory...then in the evening, I performed a cardinal sin...I checked the overnight session!

NOTHING good ever comes of me checking the overnight sessions. I get worked up, lose sleep, and ultimately make dumb trades - a hat trick of grief and stupidity.

Last night was no different...when I checked, I was slightly underwater on the position, panicked, and sold it off. In trader's parlance, I "sold to the sleeping point."

Then came the news, and where's the A$ sit now? Over $0.82! Moral of the story? Be careful trading those overnight sessions...the moves never seem to stick!

But don't worry - I wasn't going to leave it at that. No way, not when I can inflict more pain upon myself. I just reinitiated the position from the supermarket cafe I'm typing this from. What a boon wireless internet is - to make dumb currency trades 5-10 years ago, you'd have to dial the phone and talk to a real human being!

Now I'm off to the antacid aisle...

If you're toying with a move into the A$, here's some recent coverage you'll want to review:

• How much longer can the Australian dollar rally?
• Australian dollar still kicking ass!

Vegemite sandwiches are getting a bit more expensive, real fast.

(Source: Barchart.com)

The Fourth Turning...Into the Greater Depression?

Take a minute to think about your view of human history, and our continued progression as a species.

Do you believe human history is linear...always getting better...onward and upwards to a better existence?

Is it chaotic...stuff happens, people react, then more stuff happens...but there's no pattern to it?

Or...is human history cyclical...with those who neglect history destined to repeat it?

Most of the Western world subscribes to the linear school of thought. Things are always moving in a general direction - sometimes good, sometimes bad, but always moving. And I'd assume that most people believe the general trend of progress is up.

Your individual opinion may depend on your generation. Old timers are often pining for the "good old days" when morals and values "meant" something in America, you could go to the movies for a nickel, etc.

On the other hand, today's youth wants nothing to do with their parents or grandparents generational values and culture. I'm 27 years old...and the though of growing up in a 1950s Leave It To Beaver household isn't too alluring for me.

For the longest time, I held a predominantly linear view of history's progression. This very well may be biased by my own personal experiences. I run a software startup by day, and blog and trade online as a hobby...none of which would have been possible 10+ years ago. What the heck would I have done then?

On our Honeymoon a couple of years ago, my wife and I were staying in a remote hotel in Costa Rica. Very limited TV, no internet...for 3 whole days. By the time we got to a modern hotel, I was soaking up as much CNBC Europe as I possibly could...my wife asked why we had to spend our evenings with Larry Kudlow...but hey, I'm just not going to sit outside under a coconut tree and chill out. Not my thing. I like being plugged in.

So in my eyes, there's no doubt about the progression of the world...I wouldn't want to live at any other time...there are more plugs today than ever before, after all...and I'm always excited what the next 5-10 years will bring.

But are there setbacks in human progress? I mean, the world did basically nothing from 500 - 1500...except hang out in castles, work the land, pray, and tithe. That's 1000 freaking years!

How can that happen? How can the world stop moving forward for that long?

And there are more recent examples of setbacks and stalls. The Great Depression wasn't really that long ago. From 1929-1945, the US was in a major depression, then a world war. Not fun.

Can history repeat...or as Mark Twain said, rhyme? Are we "beyond" these setbacks...or are we arrogant to think so?

The Fourth Turning, by Neil Howe and William Strauss, is a fantastic book that explores US history, drawing definite cyclical patterns that date all the way back to the War of the Roses. Here's the crux of it.

A human life lasts roughly 80 years. Even though humans are living longer on average today, a full life has always been about 80 years...averages were skewed downwards in earlier times, because there were more premature deaths, but a "full life" has always been about 80 years.

At any given time, you've got about 4 generations of people inhabiting the US, separated by about 20 years each. These generations are shaped by their shared experiences...so their beliefs, their actions, etc, are really a function of the country they grow up and live in.

Now here's where it gets interesting - roughly every 20 years...going back to The War of the Roses in England, and carrying through to the Glorious Revolution in the New World...all the way to the present day...a new era dawns in America.

These eras fit into one of four categories which always repeat in the same successive order. Sounds wild...I couldn't picture it until reading the book...but here are the four eras that Howe and Strauss define:

Crisis - Oftened defined by a major war, calamity, depression, etc. Think Revolutionary War, Civil War, and Great Depression/WWII.

High - What follows the Crisis. Hey, we got through it, now things are looking up, up, and up. I think this is what Jim Rogers says he sees in Sri Lanka - the war is almost over, Crisis phase nearing an end, what a great time to invest. In the US, the post WWII baby boom, suburban migration, and Leave it to Beaver would make up the High. We can go to the moon, we can do anything we put our minds to!

Awakening - A younger generation comes of age, and resents all the rules set by The Man during the High period. Since Highs follow Crises, they are characterized by rules and structure. Think 60's America as the resistance to this - Woodstock, Tie Dye, and Free Love.

Unraveling - The Awakening uprising is integrated into mainstream culture, and society starts to split apart at the seams...hence the name. The individual rules the day. It's "me first." Old timers lament the lack of virtue and civic spirit. Prime time for Wall Street and Las Vegas.

According to The Fourth Turning, each generation is shaped by the era it was born in. I grew up during an Unraveling...so according to How and Strauss, that has shaped my beliefs. The only world I know is one of relative peace and prosperity. Depressions and major wars are things I've only read about.

So the theory goes that the farther you get away from a Crisis, the more likely you are to repeat it...because the younger generations don't actually believe it can happen again. They think the ills of the past have been fixed...and often very limited knowledge of the last Crisis in the first place...so in fact, they have the perfect personality for causing the next crisis!

Remind you of today's economists spouting off about why we can divert depressions this day in age?

Unfortunately for us...the timer's starting to tick down, and the next batch of crisis cookies are about due out of the oven here in America.

• 1773 - 1794: American Revolution

• 1860 - 1685: American Civil War

• 1929 - 1946: Great Depression...leading to WWII

• 2007 - ??? : Credit Crisis...leading to recession...leading to ???

About every 80 years, America is really put to the test. And remember, history is not predetermined. There was a genuine threat to our nation during each of these preceding crises.

Strauss and Howe believe that these crises are not only unavoidable, but that they are also necessary...to cleanse society, shake out the excesses that have built up over the past three eras, and set everything on a new course going forward.

For further reading on this topic, I'd highly recommend you check out Doug Casey's essay Foundations of Crisis. Doug is one of my absolutely favorite writers and speculators, and he does a great job at breaking down the generational roles referred to in The Fourth Turning.

It's well worth a read - an interesting, well thought out hypothesis, backed up by historical anecdotes and stories. As an investor, it's important to understand potential cycles, so that you don't get blindsided. Protect yourself and your investments, and pick up a copy.

It's Official...Government Motors

The US continues to complete the transition to a centrally planned economy. Like all socialist experiments in history, this one will not end well.

Perhaps the climax of the Crisis stage will see the complete collapse of socialism and big government in the United States. Get your popcorn ready!

In Case You Missed It...This Week's 5 Most Popular Posts...

1. This ain't your grandpa's deflation...This Week in Commodities
2. Marc Faber sees US inflation eventually nearing Zimbabwe levels
3. Jim Rogers' favorite country (surprise - it's not China)
4. Wheat, corn stocks still near 30-year lows
5. How to time the gold market

Positions Update

Big, big week for commodities! The "inflation trades" look like they are on in full earnest - the dollar is hurting, the long bond continues to rise, and the usual cast of commodity characters are all looking very strong.

I didn't make any trades this week, but am giving a hard look at adding an Aussie dollar position. We chatted on May 20th about this...with the A$ at $0.77, we thought it could keep rallying. Well...it has!

Another 3-cents in a couple of weeks - en fuego!

The trend for the A$ is up, up, up.

(Source: Barchart.com)

Current open positions:

Current Account Value: $34,358.15

Cashed out: $20,000.00
Total value: $54,358.15
Weekly return: 7.9%
2009 YTD return: -32.4% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

This Ain't Your Grandpa's Deflation...This Week in Commodities

Common wisdom holds that depressions are inherently deflationary.  The United States in the 1930's.  Japan in the 1990's and 2000's.

Combine a depression with other deflationary factors going today in the US - demographics, deleveraging, falling asset prices, even productivity - and you've got some serious deflationary headwinds.

(As a side note - I've warmed to the view that gentle deflation, as a result of increasing productivity, is the optimal, and honest, situation that promotes both savings and economic growth.  It's silly to label all deflation as "bad" or "evil"...how can deflation created by increased productivity be bad?  But I digress.)

Ben Bernanke, a student of the Great Depression, believes that the Depression could have been averted if deflation had been averted.

Determined not to repeat the mistakes of history - or what he thought were the mistakes of history - Bernanke took unprecendented measures...first, lowering interest rates as far as they would go...next, utterly trashing the Fed's balance sheet...and finally, when all else failed, he cranked up the printing presses.

Printing money always leads to inflation...in fact, printing money...or quantitative easing...is inflation.  Rising prices - which follow - are the symptoms of inflation.  

But what if you just print the money "for a little while"?  That's right - print it up, float it out there to keep the economy from grinding to a halt - and then when things are moving again, start to pull it back in.

Doesn't it sound insane?

Well, this is what is being tried.  And as hyperinflationary as this sounds, even the most fervent inflation hounds believe it will be a year or two or three before we start to see inflation creeping into the system.

Too much credit was destroyed, the velocity of money slowed down too much...logical reasoning dictated that it would take the Fed time to print enough to make up the gap...even at the rapid rate in which they were printing.

Then a funny thing happend while we were chilling out, getting comfortable, and generally not worrying about inflation - commodity prices started to move up.  The dollar started to drop.  Bond yields started to climb.

Falling Dollar, Rising Bond Yields = An "Uh Oh" Sandwich

Remember when every investor in the world was worried about the dollar's poor fundamentals?  McDonald's was poking fun at the dollar in it's commercials...music videos were flashing euros...supermodel Gisele Bundchen asked to be paid in euros rather than dollars.

That marked a bottom - at least a short term bottom - in the dollar.  Everyone was on the same side of the trade - short the US dollar.  

When world financial markets collapsed, a global "flight to safety" and massive short covering propelled the dollar up, up, and up.  

For awhile, nobody worried about the dollar's fundamentals...at least in the short term.  The Fed's printing money?  Hey, no problem, the dollar's still the world's reserve currency.  Besides, other countries are printing money too.  Why worry?

In the meantime, the dollar quiety began to slide...and the dollar index is now sitting at its low point for 2009:

It's a quiet race to get rid of US dollars once again. 

(Source: Barchart.com)

Makes you wonder if currency fundamentals do, in fact, still matter...if printing money is indeed bearish for the value of the currency being printed.

Meanwhile, what has The Fed been doing with it's newly printed dollars?  It's been buying long dated US Treasuries to keep yields down!

Nobody else is buying this trash, so it's up to our printing presses to pick up the slack.  The Fed announced this "newly printed cash for trash" program last December - when yields on the 10 and 30 year bonds were dropping, and deflation was king.

Common wisdom held that deflation, combined with these "monetization purchases" by The Fed, would continue to drive rates down...possibly all the way to zero.

But a funny thing happened on the way to Japan...rates bottomed on December 18, 2008, and have been climbing ever since!  Long dated Treasuries have been slammed throughout the first half of 2009!

30-Year Treasuries are not behaving like we're in a deflationary environment

 (Source: Barchart.com)

Uh oh...this is not good.  What a Fed to do?

If they let interest rates rise - that will surely squash whatever is left of the US consumer.  Green shoots turn into marajuana buds - game over.

But the only way to prevent interest rates from rising in the near term (short of cutting government debt, which we know is not going to happen) - is to step up their purchase of long term bonds.

So applying a little game theory to the Fed's current hand - we have to expect them to sacrifice the dollar.

The twist, I believe, is that the dollar could get trashed quite soon.  So I would strongly advise you to take a hard look at your savings and investments - right now.  

Charts don't lie.  No matter what our personal beliefs or biases are about the future, no matter what we think is going happen - we have to defer to what the markets are telling us.  And right now, the markets are starting to say "uh oh."

It could be a breathtaking move out of the dollar - it's value could feasibly get trashed in a matter of weeks, days, or even hours.  Don't be the one left holding the "Old Maid" card as the rest of the world runs for the exits. 

In Case You Missed It...This Week's 5 Most Popular Posts...

1. How to Time the Gold Market
2. The Dumbest Inflation Explanation I've Ever Heard
3. Marc Faber: We've Begun a 15-20 Year Bear Market in Bonds
4. What is the Breakout in Gold Stocks Signaling?
5. Can Commodities Decouple From Stocks?  This Week in Commodities

Positions Update - Back in the High Life Again!

What a week put by the Aussie...while the USD tanked, the A$ soared - moving up over 3.5 cents in one week!

I believe the Australian dollar could continue to rally further from here, and will be holding this position until we see a change in the trend.  Because we know that the trend is our friend!

OJ was down slightly on the week...some rain in Florida to snap the drought.  Prices held strong though...they could be consolidating before the next move higher.  We're still at fairly cheap prices on OJ, so there is room on the upside.

Not to cry over spilt milk - or in this case, spilt sugar - but I should not have "taken profits" in my sugar positions last week.  Just goes to show that when the trend is on your side, you don't sell and wait for a pullback...because it may never come!

Shame on me, and now I sit on the sidelines, waiting for a further breakout to the upside to reinitiate this position.

Finally with a little dry powder sitting around, I decided to "punt" on a Mini Soybeans contract on Friday.  Beans have been extremely strong, driven by demand from...you guessed it...China.  The soybean complex is a favorite of the Chinese - more so than corn and wheat - and as a result, beans have leading the pack as far as the grains go.

Soybeans are on the move, driven by Chinese demand. 

(Source: Barchart.com)

Current Account Value: $31,836.61

Cashed out: $20,000.00
Total value: $51,836.61
Weekly return: 11.6%
2009 YTD return: -37.3% (Don't call it a comeback??)

Prior year's results:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial stake: $2,000.00

How Much Longer Can the Australian Dollar Rally?

The trend is our friend...and right now, the trend in the Australian dollar is up, up, and up.

Source: Barchart.com

A couple of weeks ago, we took note of the rally in the Aussie - and decided to initiate a position.  Boy am I glad we did...since that time, the A$ has rallied nearly 4-cents, and is currently sitting above the $0.77 mark!

Can the rally continue, or has the A$ come too far, too fast?  If you're trying to decide what to do with your position - or deciding whether you should initiate one here - I'd highly recommend checking out this informative video on where the Aussie could be heading, courtesy of INO.com's Adam Hewison.

As you may recall, I expressed concern over the weekend that the Aussie had not yet decoupled from stocks.  Well our favorite currency analyst, Everbank's Chuck Butler, believes the Aussie may be close to cutting this link:

So, as I just said, Tuesday saw the currencies trade right back to the levels they enjoyed VS the dollar last Thursday, before risk assets began to sell off on Friday. These are the types of trading patterns you normally see when the assets involved are getting ready for a break out... A jail break... Tonight there's going to be a jail break!

OK, I'm not saying that the jail break takes place tonight, I just broke out in a song from the 70's... That's all... Seriously though, I hope we're seeing a return to fundamentals.

What's the easiest way to trade the A$?  Check out the ETF FXA...that's probably your best bet.

Or, if you're looking for a way to diversify your personal savings, you can check out a foreign currency account from Everbank.

Further reading on the A$:

• Can Commodities Decouple From Stocks?
• Australian Dollar Still Kicking Ass
• A$ Hits 6-Month High...Can It's Rally Continue?

Australian Dollar Still Kicking Ass

Monday night, we were fortunate enough to initiate a long position in the Australian dollar.  I took a long, hard look at it before entering the position - on one hand, it had already been rallying strong and was afraid may be due for a pullback.  But the fundamentals and technicals looked too good, so I closed my eyes and hit the Buy button.

And now am glad I did, as the Aussie earlier rallied above the 75-cent mark!  Here's the good word on the latest pop from my favorite currency analyst, Everbank's Chuck Butler:

But the Big Winner of yesterday and last night is the Aussie dollar (A$)... It's on a moon shot, since the Reserve Bank of Australia (RBA) left rates unchanged the night before, and issued a balanced statement afterward, with emphasis on waiting to see the affects of the previous rate cuts. The A$ got an additional boost this morning when it was reported that the unemployment rate in Australia fell for the first time in 8 months! The A$ is 75-cents and change this morning, heading to 76-cents... A 7-month high! 

Australian Dollar Hits 6-Month High...Can It's Rally Continue?

The Australian dollar topped the 74-cents mark today to hit a new 6-month high against the US dollar.

The Aussie has been rallying strong of late, and this recent strength is now also underpinned by yesterday's decision by the RBA (Reserve Bank of Australia) to hold interest rates at 3% for at least the near term.  The positive rate differential for the Aussie compared with the US Dollar and Japanese Yen should be a bullish fundamental factor going forward.

Also in Australia's favor is the renewed strength in the Chinese economy, and commodity prices at large.  A continuation of these trends should help the Aussie's rally continue, since the Austrailian economy is largely commodity driven.

We can also credit some of the recent strength to the rally in world equity markets.  With markets rallying, risk aversion appears to be creeping back into play, as investors and traders are once again loading up on high yielding currencies.

Finally it's important to note that Australia is one of the lone major economies not to yet engage in quantitative easing - also known as "money printing."  The US, UK, Japan, and Switzerland have all turned to QE.  As strange as this may sound, a steady supply of money is usually bullish for a currency, especially when priced against others that are being printed at full speed and dropped from helicopters.

Potential roadblocks for the Australian dollar?  A downturn in the markets - which is a real risk, given this is likely a bear market rally - could once again dampen investors' risk appetite and prompt them to sell the "higher risk" currencies and flea back to that beacon of safety and fiscal responsibility, the US dollar. 

All in all, I weighed the risk/reward factors last night, and decided to go long 1 Australian dollar contract.  I am long-term bullish on the currency, and the recent breakout was enough of a technical indicator for me to take the leap.

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View the full FOREX:AUD-TN chart at Wikinvest

How can you too invest in the Australian dollar...without trading futures?

• Buy the ETF FXA, which tracks it's price
• Open up a CD with EverBank denominated in Australian dollars

For further reading... here's our most popular article of the day: How Bad Will The Financial Crisis Get?

Is Australia Turning Around?

More good news for Australia's economy - and the Australian dollar.

This builds upon our review yesterday of the Australian dollar's attractive prospects. The A$ is up $0.112 as I write, currently sitting at $0.7163.

From Everbank's Chuck Butler:

Down Under... Australia saw Consumer Confidence rebound for the first time this year... Here's the skinny... The Westpac-Melbourne Institute index of consumer sentiment rose 8.3 per cent to 92.7 points, from 85.6 points in March.

However, the index remains below 100 points, signaling pessimists are outweighing optimists, for the 15th month in a row.

Westpac chief economist Bill Evans said the result was "surprisingly strong" and followed a month of more positive economic news and a rise in the Australian dollar exchange rate and the stock market.

Just another brick in the wall... All in all, it's just another, brick in the wall... OK, what am I talking about here? I'm just infusing some Pink Floyd into my recent thoughts that Australia "may" be turning the corner... I also received a note from a reader that was traveling in Australia. The reader mentioned that they are not seeing the financial panic there... So... Some news from a correspondent on the road!

End to Rate Cuts Could Propel Australian Dollar

Is the Australian Dollar poised to climb again?  EverBank's Chuck Butler believes the Reserve Bank of Australia may be done cutting rates, in anticipation of an economic recovery, and underpin a rally in the Aussie $.

In Chuck's own words:

Yesterday, I told you that the Reserve Bank of Australia (RBA) had cut rates 25 BPS, and the A$ was recovering from the blow of a rate cut, but one that wasn't as big as traders thought... Well, there was more news from the RBA, and their Gov. Mr. Stevens, who said that "the recession in Australia is much milder than those in Europe and the U.S." Hmmm, I think he was preparing to leave the rate cut table, don't you? To me, that's Central Bank parlance for "This is it, no more rate cuts!" Which, if it's the case, the A$ should begin to see some real activity...

Furthermore, any economic strength out of China could also help the Aussie $ as well.

The A$ appears to be consolidating, poised for a potential climb.

Editor's note: Everbank offers CD's in foreign currencies, such as their New World Energy Index CD, which is 1/3 Aussie dollar, 1/3 Canadian dollar, and 1/3 Norwegian Krone.

Weekly Futures Positions Review - December 21, 2008

Top posts from the past week:

• Inflation or Deflation - Which Will Prevail?
• Fed Out of Ammo; Dollar is Toast
• Stratfor: Oil Prices Likely to Remain Low

Our coverage of Marc Faber's recent interview on CNBC from December 1st continues to see a lot of traffic.

A review of our trades from the previous week:

• Bought a Swiss Franc position on Tuesday. Tried to pyramid with another position Wednesday night. Sold both on Friday - about even after it was all said and done. Check out this volatility:

• Bought an Australian Dollar position on Tuesday - sold it on Friday at a loss. Again, we unsuccessfully timed the breakout here.

• Bought a Mini-Gold position. Again, tried to buy the breakout.

• Bought a Cocoa position. Ditto.

Our wish list...everything here looks beaten down...silve

• Sugar
• Coffee
• Cotton
  
• Natural Gas
• Silver
• Crude Oil
• Wheat
• Corn

Open positions

Date	Position	Qty	Month/Yr	Contract	Entry Price	Last Price	Profit/Loss
12/15/08	Long	1	MAR 09	Cocoa	2586	2587	$10.00
12/15/08	Long	1	FEB 09	Mini Gold	836.6	837.5	$29.88
Net Profit/Loss On Open Positions							$39.88

Account Balances

Current Cash Balance	$47,927.72
Open Trade Equity	$39.88
Total Equity	$47,967.60
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$47,967.60

Cashed out: $20,000.00
Total value: $67,967.60
Weekly return: -3.6% --> Mostly due to the bad Aussie dollar trade
YTD return: -11.9%

***"Cash out" mostly means taxes, but lately we've also been using it for living expenses, and also to finance a cool new time management software startup that is starting to lift off - and was recently covered by the Sacramento Business Journal.

Current Commodity Futures Positions - 8/03/08

Will post some thoughts later in the week on the positions...

Open Positions

Date Position Qty Month/Yr Contract Entry Price Last Price Profit/Loss 07/23/08 Long 1 SEP 08 Australian Dlr 0.9567 0.9280 ($2,870.00) 06/17/08 Long 1 DEC 08 Cotton 82.20 70.72 ($5,740.00) 07/30/08 Long 1 FEB 09 Live Cattle 108.850 110.225 $550.00 08/01/08 Long 1 FEB 09 Live Cattle 110.700 110.225 ($190.00) 07/29/08 Long 1 OCT 08 Sugar #11 12.84 13.78 $1,052.80 07/31/08 Long 1 OCT 08 Sugar #11 13.91 13.78 ($145.60) 07/31/08 Long 1 SEP 08 Swiss Franc 0.954900 0.9574 $312.50 Net Profit/Loss On Open Positions: ($7,030.30)

Account Balances
Current Cash Balance	$81,107.68
Open Trade Equity	($7,030.30)
Total Equity	$74,077.38
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$74,077.38

Cashed out: $15,000.00
Total value: $89,077.38

Weekly return: -3.8%
YTD return: 12.9%

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Current Commodity Futures Positions - 7/27/08

Current thoughts on these futures markets:

Australian dollar - Of course, what would a currency trade be without a trip to the wrong side of the ledger? I've decided I am no longer using breakouts to determine my entry points with currencies, and have jumped into the Aussie on what I deemed a 'pullback'. Since, the market has pulled farther back.

Even so, I still like the Aussie to reach parity with the US dollar (probably sooner rather than later). You've got the nice interest rate differential, and you've also got a commodity currency vs. a make believe currency backed by the faith of the US gov't.

Cotton futures - Bounced a bit. They have to head higher eventually. Jim Rogers, in his talk at the Agora Investment Symposium this week, named sugar, cotton, and coffee as his favorite commodities right now.


Corn futures - Still in free fall to start the week, have since bounced a bit. Remember corn started the year at $4, so it is still up nearly 50% on the year. Traders are in waiting mode right now, trying to figure out how this year's crop is looking - and right now, despite the flooding, it looks pretty good.

Potential trades on the horizon for me:

• Long sugar
• Long coffee
• Short US treasuries (esp. 10 year)
• Long Swiss Franc
• Long Japanese Yen
• Long Live Cattle
• Long Lean Hogs
  

Open Positions

Date Position Qty Month/Yr Contract Entry Price Last Price Profit/Loss 07/23/08 Long 1 SEP 08 Australian Dlr 0.9567 0.9497 ($700.00) 06/17/08 Long 1 DEC 08 Cotton 82.20 74.80 ($3,700.00) 07/14/08 Short 1 DEC 08 Mini Corn 688 599 $890.00 Net Profit/Loss On Open Positions: ($3,510.00)

Account Balances
Current Cash Balance	$80,487.27
Open Trade Equity	($3,510.00)
Total Equity	$76,977.27
Long Option Value	$0.00
Short Option Value	$0.00
Net Liquidating Value	$76,977.27

Cashed out: $15,000.00
Total value: $91,977.27

Weekly return: Hell, let's just call it even...don't feel like digging out the spreadsheet
YTD return: 16.8%...roughly

***BTW, I usually "cash out" money just to pay for taxes, rent, and cheap beer. So total value is all pre-tax.

Australian Trade Gap Shrinks, Aussie Rallies

Good news out of Australia, and a nice job by Bloomberg comparing the rate situation between Australia and the US. Bottom line is the US is basically already in a recession and rates here are coming lower - Australia is still hot and rates are going higher. That is bullish for the Aussie dollar.

By my count, this is the highest the Aussie's been since late November, marking an entry point for me.

I'm glad to be back with the Aussie dollar, though the weight of the carry trade continues to hang on what should be a bright future. I expect the Aussie to begin a climb towards parity with the US dollar, but it sure won't be a smooth ride.

Strong Aussie Retail Sales

Keep an eye on that Aussie $ - let's see if it can break through the 0.89 mark.

From Chuck Butler in today's Daily Pfennig:
And on that note... Australian Retail Sales gained for a 6th month in November, advancing .8% from October. I'm telling you now, so you can hear me later... The Reserve Bank of Australia (RBA) will be raising rates this quarter... And think of what that might do to a currency that already enjoys a big rate differential to the U.S. dollar, while the U.S. dollar's rate goes lower, and lower, and lower...

Weakening Pound Sterling - Will Aussie $ Benefit?

Anyone who's been reading for the few months know what a big fan I am of the Aussie $. Here's another angle why it's due to rise from the Daily Pfennig and Chuck Butler.

You know... A month ago, while I was in Florida on Marco Island speaking at the Wealth Masters Conference, my colleague, Chris Gaffney told everyone that pound sterling had seen better days, and he looked for pound weakness... He was quite bang on, eh? I have to say that I truly believe that the U.K. has similar problems as we do in this country with regards to housing... The one thing they don't share with us is rising inflation! Interest rates will come down in the U.K. this year, and that will end pound sterling's run as a financing currency of the Carry Trade...

So... If pounds get sold on one side of the Carry Trade, investors will be looking for other high yielders, like Aussie dollars... Where interest rates aren't coming down, and in fact could be going higher as we go along in 2008...

Unfortunately the Aussie is struggling to break to the upside - the unwinding of the carry trade continues to slam it down everytime a rally starts. We'll keep an eye on the situation here for good entry points.

On an aside, look for faster Renminbi appreciation this year. I think it was up about 7% against the US dollar last year - but down against many currencies (the US dollar depreciated about 9% last year against a basket of major currencies - yikes!)

The Chinese gov't won't let you buy Renminbi directly, so the best you can do is use a place such as Everbank, which can give you an account that tracks the currency.

Slowing Aussie Retail Sales

Hopes for a near term Aussie bounce are looking dimmer - from today's Daily Pfennig:

In Australia overnight... Retail Sales slowed for a second month only advancing .2% in October, although September's sales were revised upward to .7%, this October reading has put a lid on any rate increase before year-end... The Reserve Bank meets tonight to discuss rates, and at one time I held out hope for another rate hike before year-end... Unfortunately, this Retail Sales report probably put a damper on that rate hike, now, at least...

This won't help the sagging A$ either... With Carry Trades being unwound, the high yielders get taken to the woodshed and beaten like a rented mule... And with no support from the Central Bank, rate hike wise, the A$ will probably have to remain in the woodshed even longer...

If the Carry Trades are truly being unwound, and it's not another false dawn, look for yen and Swiss francs to become the last ones on the roster but number ONE in the hearts of the fans!

The Aussie chart does not look great either, but there does appear to be some support around the .8650 mark. As much as it hurts to take such a large bath on one position, it will likely be time to sell if it drops below the support levels. Contracts are trading at .8719 as I type this.

Pullback in Commodity Prices Hurts Aussie $

From Today's Daily Pfennig:

The Australian dollar fell over the weekend as a combination of the unwinding of the carry trade and reports of a widening trade deficit combined to work against the AUD$. The currency also weakened as the price of commodities that Australia exports stayed near the lowest in two months. The trade deficit expanded to just under A$ 3 million in October from a revised A$ 1.92 million a month earlier. Falling prices of commodities, which contribute about 17 percent to Australia's economy was the main reason for the rising deficit. We probably haven't seen the end of the volatility in the Australian dollar, but remain confident that the A$ will hold its value in the log run. Both China and India will continue to grow, and their demand for commodities will expand with the growth of their economies. This growing demand will keep a floor under the Aussie dollar.