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

Boy, Is CNBC Yucking It Up Today!

I'm working from the road today, so I've got the nice benefit of having CNBC on here - man, are they yucking it up today!

With the Dow hitting a new 2009 high, I haven't heard anyone expressing any skepticism - "all the stars are aligned for higher stocks" is something that was just pronounced!

Best part of the day so far, they just paraded out a dollar bull like a sacrificial lamb, asked him when he was going to give up on that losing trade, and then cut to commercial during his response.

Of course I have been wrong for the past few months on this, so you are welcome to ignore my musings as you'd like. Worth noting that even I felt like throwing in the towel on my bearish stance midday today - and you know what happens when the last bear finally capitulates...look out below!

Comparing the 2008-09 Stock Market With the Great Depression's 1st Leg Down

This epic stock market rally has done exactly what it was supposed to do - it's retraced about half of the losses from the previous crash. It's got folks feeling comfortable again - while maybe not outright enthusiastic about things, they now believe the carpet is not going to be pulled out from under them.

That's exactly what buying stocks now is a more dangerous proposition than it has been anytime this year thus far.

So can big rallies, following big crashes, be sustained?

I did a little bit of digging through historical data, to see if there was a case where a severe crash was isolated - that is, it retraced back up, and there was nothing more to it. Typically, crashes occur in three legs down (five "waves" in total, counting two countertrend bounces) - at least this was my belief, which I wanted to double check.

I'm going to compare this market crash/rally with the crash/rally from 1929/1930, and only that, because I was not able to find another market crash, and subsequent rally, as severe as what we've experience over the past year or two (severe being 50%). I wish we had another example to look at, but I wasn't able to find one since 1900 in the US that met this criteria!

The Great Depression's first leg down, and the 2008-09 markets, are in rarified air that meets these stomach churning guidelines:

1. A ~50% stock market drop
2. Followed by a ~50% stock market rally

Astute traders and investors, no doubt of which our readers here are, know full well that 50% down, followed by 50% up, does not get you back to break even!

First, let's take a look at the first leg down of the Great Depression, using the Dow Jones Industrial Average (DJIA) as our measuring stick.

Source: StockCharts.com

Date DJIA % Change # Days

09/03/1929 381.17

11/13/1929 198.69 -48% 71

04/17/1930 294.07 +48% 155

You have to love the symmetry of the 1930 rally! 48% down, then 48% up...before turning back down. Eventually the DJIA bottomed in 1932 at 41 - shedding an awesome 80% from the Dow's 1929 high.

Now, let's check out the newly minted Crash of 2008:

Source: StockCharts.com

Date DJIA % Change # Days

10/09/2007 14164

03/10/2009 6547 -54% 518

10/19/2009 10092 +54% 223

Oh the symmetry is fantastic! This time we retraced 54%, after giving up 54% initially - again roughly 50%.

Now, the million dollar question is: "Where to next?"

It's hard to make an argument for stocks continuing their rally from here. They are expensive by all traditional valuation measures, the economic recovery is not robust (maybe even non-existent), and until proven otherwise, this rally has been nothing more than a standard retracement.

The stock market doesn't just drop 50% for no good reason. Something more is usually amiss. Judging from the only recent historical analogy we have to use, caution is still the order of the day!

Positions Update - Even Shorter the S&P

A disappointing week for us dollar bulls/S&P bears. But, after 5 consecutive up days for stocks, we are not yet at new highs - nor are we at new lows for the dollar.

So, until further notice, I am classifying last week as a countertrend bounce, which could reverse as soon as tomorrow.

I did short another S&P contract on this rally - currently underwater on that position - so we shall see if that was a wise move in the weeks to come.

The dollar continues to muddle along - with strong support at 75.

(Source: Barchart.com)

Was last week a countertrend bounce for the S&P, or the start of a rally to new highs?

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $22,947.03

Cashed out: $20,000.00
Total value: $42,947.03
Weekly return: -11.6%
2009 YTD return: -54.8%

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

Initial trading stake: $2,000.00

Jeff Clark Agrees: It's Time to Buy the Buck

Last Sunday I wrote that I thought it was time to go long the US dollar. Investor sentiment is near record low levels, which usually means the price has nowhere to go but up, at least in the short term.

When making a contrarian pick like this, you usually prefer to see articles that take the opposite view, rather than the same one - otherwise you start questioning your original hypothesis!

But when I saw that expert trader Jeff Clark agrees that the buck is a buy, I was pleased...in fact, I would have had to reexamine my position had he taken the opposite side! Jeff writes:

But as we've seen so many times before, when everybody lines up on one side of a trade, the odds favor it going the other way. Consider what happened in July 2008. The dollar index was pounding out new lows, and the Daily Sentiment Index dropped to just 5% bulls. It seemed everyone was bearish on the buck, and they were betting heavily on its demise. Four months later, the dollar index had rallied over 20%.

We're seeing something similar today. Everyone is convinced the dollar is a doomed currency. And they're probably right over the long term. There are a lot of stops on the way to the graveyard, however. And like the monster, Jason, in all those Friday the 13th movies... just when you think he's dead for good, there's another sequel in the making.

You can read the rest of Jeff's analysis here - and if you're interested in checking out his premium trading services (they are expensive but excellent), you can learn more here.

How can you trade this? UUP is the ETF you're looking for. Or, you can of course use futures or options as well.

The dollar may be finding a bottom.

(Source: Barchart.com)

It's Time to Go Long the Buck

Three weeks ago, we discussed the possibility the the dollar was bottoming and poised for a major rally.

My reasoning was that:

• Sentiment was overwhelmingly negative on the buck. I noticed that even traditional contrarian investment sources appeared to be piling on. When there's nobody left to sell, that's usually a good sign that the bottom is in.

• We still appear to be in a period of debt deflation, which the Federal Reserve is basically helpless in preventing, because we have a credit based system. When credit goes away, it's gone forever. You can't print credit.

• The Japanese Central Bank, despite its best efforts, was ultimately unable to produce inflation since their credit bubble popped in 1990. And if the old joke is that their central bank was so incompetent that it couldn't destroy its own currency, I didn't know why ours would be any different.

What's happened in the last few weeks?

Pulling up the chart, the dollar appears to be forming a bottom. The 77 mark has held:

Is the buck bottoming?

(Source: Barchart.com)

The equity and commodity markets look toppy. Investor sentiment is overwhelmingly bullish. The AAII index, a very reliable contrarian indicator, is at levels not seen since November 2007.

Furthermore, China, the posterchild of this rally, has turned down - the Shanghai Index rolled over a few weeks ago...along with several key commodities. Gold is yet to break $1,000 decisively, despite the widespread belief that the Fed has successfully created inflation.

Add it all up, and we've got some very bearish pieces staring us in the face. And if we do see another massive deflationary wave down...is there any reason to believe it will behave differently than the last?

I don't think so. So I'm taking some cues from the markets, and positioning myself in the only asset that held up and even rallied the last time around - the US dollar.

Take Note When Bears are Bullish

One of our astute readers took me to task when I said Robert Prechter was not a perma-bear. In fact, this reader made a very good case, pulling up some old doomsday calls of Prechter's that look silly in hindsight.

We had a good back and forth debate - I accepted his points, but added that Prechter has called this rally to a tee, which was a bullish call.

Ultimately our reader summed it up perfectly:

Funny thing is he has called 2 rallies well 1980s bull market and this most recent rally.

He gets in trouble once he goes bearish (which he has been 18 of the last 20 years). Had he gotten away from this stupid (dow 400, great depression II) perma outlook of his, he would be much better. Then again, maybe its this permabearishness that somehow, someway gives him the ability to call rallies.

Maybe the real take away - the lesson of the last 20 years, is heed his calls of rally, ignore his calls of doom. Imagine how well we would have done!!! ;

A hilarious, and very insightful conclusion! We should especially take heed when the bearish types turn bullish!

I suppose the counterpoint would also be a wise one - be wary when perma-bulls turn bearish!

Positions Update

Still holding cotton - barely - and now we're taking a flyer on the buck.

It's tough to sell cotton here - and also tough to get excited about it. In a healthy global economy, cotton's fundamentals would appear to justify higher prices right now. The fact that we don't have them gives me pause that something is amiss - perhaps cotton is telling us that things may not be so fine and dandy.

Cotton continues to range trade.

(Source: Barchart.com)

Open positions:

Current Account Value: $23,891.64

Cashed out: $20,000.00
Total value: $43,891.64
Weekly return: -2.0%
2009 YTD return: -53.0% (Yikes)

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

Initial trading stake: $2,000

Robert Prechter: Dollar's Hit a "Major Bottom"; Get Ready for a Deflationary Depression

Here are a couple of very insightful video interviews with Robert Prechter of Elliott Wave International:

• Part I - Prechter believes the dollar has bottomed, because of the formation in the Elliott Wave pattern, and also the extreme bearish sentiment we're seeing.

• Part II - He explains his deflationary depression hypothesis and why he believes the next big phase thing we'll see will be a massive "credit implosion" - which will set off a mad dash for dollars.

I really love his line:

This is how markets work - they give you a story at the bottom, and a story at the top.

He shared this when asked about the mainstream reaction to the stock market rally (inflation and commodities are back, etc). Prechter believes that markets make the news, not the other way around.

If you enjoy Prechter's insights, they have a lot of great, free content available if you sign up for Club EWI -now's actually a good time to do it, as they're giving away a free Ebook until the end of the week.

We will, of course, continue to cover his analysis here - I'm a big fan and an EWI subscriber myself. And I have a sneaking suspicion that as crazy as his theories can sound, he might be right on the ball here - it wouldn't be the first time Prechter's contrarian views were correct - so I am listening and following closely.

Recent articles from Bob Prechter:

• What To Do When Deflation Hits
• Does Gold Always Go Up in Recessions and Depressions?

Why the Dollar Probably Bottomed Last Week

It's pretty tough to find investors who are bullish on the US dollar these days. Judging from our dollar sentiment survey results last week, it seems like most dollar bulls probably read this blog!

When I consider:

• Not a day goes by without an investment newsletter popping into my email Inbox that highlights the dollar's pending demise.

• There are YouTube videos circling the internet, with guys breaking stuff in their garages while lamenting the dollar's loss of purchasing value since the gold standard was removed.

• Even Barron's is piling on, saying The Greenback Is Broken.

The dollar may very well be broken, but I can't see this decline lasting much longer with sentiment as negative as it is. Bearishness on the buck probably hasn't been this low since the last time it bottomed - which was even below current levels, by the way.

How is this possible? How could a currency as sick as the dollar rally?

It's not without historical precedent - take Japan's Central Bank, where the old joke is that they are so incompetent they couldn't even destroy their own currency.

Is it possible our Fed is just as incompetent? I wouldn't bet against it.

We're in a period of debt deflation that could be around for some time. It's unlikely that the Fed will be able to "print" enough money to create inflation this period is over.

Because with a credit based economy that peaked around $52 trillion in 2007, printing a few hundred billion here and there doesn't really "move the needle" when credit is getting wiped out at a much faster rate.

Finally, it's interest to note that on Friday, the dollar was up sharply while all major indices were also up big. That strikes me as a pretty bullish move, because the dollar had previously been getting killed everytime stocks were up.

Bottom line: Just because many pundits and experts believe the dollar SHOULD fall, doesn't mean it will. And my bet is that, at least for the next few months, the exact opposite will happen - because markets usually move in directions that frustrate the highest number of investors.

What You Can Learn From Tracking Hedge Funds

Last week we started a fun back and forth interview with Jay from MarketFolly. For those of you not familiar with MarketFolly - please go there now! It's an excellent site for tracking the latest holdings and insights of the greatest investors in the world.

Here's part 2 of our interview with Jay about his investing strategy, and the complimentary piece where he grilled me a little bit.

CBM: What do you learn from the investor holdings you cover?

MF: I think the main thing to take away from hedge fund tracking is ideas. Often times you will see them invest in companies you've never heard of or are less familiar with so it gives you something to look into. It's also good to see what sectors they are leaning towards and what themes they might be playing (at least for some of the macro thesis oriented funds). And, it gets really intriguing when you start to see multiple funds adding the same position. We've noticed this a lot when we track the 'Tiger Cub' hedge funds.

Read the rest of the interview here...

Quick Market Hits for the Week Ahead

• Look out FDIC! Here's why they will soon require hundreds of billions of dollars in bailout funding.

• A debt deflation case study from an industry many believe to be recession proof.

• Goldman's CEO tells his employees to "lay low".

• Finally some solid entertainment - a redneck economic rant that's hysterical, and The Daily Show highlights Tim Geithner's real estate prowess!

Daily Updates

For our weekly subscribers - we now have a daily subscription option as well (check out the upper left corner of the page).

It's powered by Google - they send you one email each afternoon, with a wrap up of posts from the day. They do a nice job with it - so if you'd like to add a daily subscription, you can enter your email address in the box there.

Positions Update

No new trades this week - cotton had a great week, along with just about every other asset class in the world.

Cotton continues to "range trade".

(Source: Barchart.com)

And, as mentioned earlier, I'm planning to "go long" the dollar index very soon.

Current Account Value: $26,388.91

Cashed out: $20,000.00

Total value: $46,388.91

Weekly return: 5.2%

2009 YTD return: -48.1% (Ouch, that's gonna leave a mark)

Prior year's results: --> Don't try this at home...this is what is known as wreckless trading

2008: -8%

2007: 175%

2006: 60%

2005: 805%

Initial stake: $2,000.00

Can The Last Dollar Bull Please Turn Out The Lights?

Over the past week, we've been investigating dollar sentiment, which appears to be overwhelmingly bearish at the moment.

I was surprised when our dollar sentiment survey revealed that only 56% of readers were bearish on the dollar. After seeing bearish readings north of 90% in some places, and anecdotal evidence to support these #'s, I was a bit surprised that our results weren't as extreme.

Though astute reader MarketAddict pointed out that perhaps our readers are a bit more contrarian in nature, and thus the balanced opinion in our house poll.

Today in Growth Stock Wire, expert trader Jeff Clark sounded a Bubble Alert in everything except the dollar.

The problem now is everybody – and I mean EVERYBODY – is bearish on the dollar. It's a doomed currency, and everyone is expecting its eventual demise. Of course, that was the case last December as well, just before the dollar kicked off a three-month rally that boosted the greenback 12% and sent stocks and commodities reeling.

From a contrarian point of view, a bottom in the dollar is near. Too many people are betting on its demise. And while they may eventually be proven correct, the market is likely to make them suffer in the short term.

We're probably no more than a few days away from an important short-term bottom in the dollar, which means we're probably close to a short-term top in the stock and commodities markets. Given the extent of the selloff in the dollar and the rally in all the other markets, a counter-trend move could be substantial.

I agree wholeheartedly with Jeff, and believe that we could be in for a powerful, sustained dollar rally coming up. So if you're glancing longingly at gold, oil, stocks, and other "dollar hedges" - this is probably a wise time to check our emotions and channel your inner contrarian.

Ed. note: I'll make a quick plug for Jeff's premium trading service, The Short Report. It's excellent - I've been a subscriber for several months now - worth checking out if you're a serious short term trader.

It's not hard to be bearish on the dollar when you see this chart.

(Source: Barchart.com)

Are you bullish or bearish on the US dollar?

We're going to have a little fun and conduct a short experiment - let us know, are you bullish or bearish on the US dollar?

Click here to take our poll

I'd like to see if we can gauge popular sentiment, to see if this provides us with an indicator of sorts - be it leading, or contrary!

If you need a time frame, let's say short term - over the next 2-3 months, do you expect the dollar to be trading higher or lower?

Results will be published, so check back later this week!