Wednesday, September 30, 2009

Trends and Friends

There is much discussion in the blogosphere about the course of the U. S. dollar vs. other currencies. Sentiment is said to be wildly in favor of dollar weakness, which is then said to be bullish. It would appear that there are many such contrarians, however!

Regular readers may know that EBR pays little attention to the value of one fiat currency against another, though in a less correlated world it might be interested in that topic. If one lives in America, one buys food in dollars. The global non-fiat currency is gold. Regardless of one's interest in the dollar vs. other fiat currencies and/or vs. gold, one might be interested in "on the margin" news that might buoy the dollar.

EBR is not a political site, but all financial sites must be aware of what's going on in politics. Fundamentally dollar bearish is the increased drift re U. S. policy in and toward Afghanistan, as discussed in a disheartening WSJ piece tonight titled Gates Doubts U.S.'s Afghan Strategy:

President Barack Obama met with senior counselors for three hours Wednesday to launch his review of Afghan war strategy, amid indications that his defense secretary -- the key link between the White House and the military -- is among those undecided about the right approach.

As Yogi Berra advised, when you come to a fork in the road, take it. Think of a deer blinded by headlights. Think of a tennis player at the net who can't decide whether to go left or right and ends up going nowhere. Commodity and currency traders see indecisiveness and invest/trade accordingly.

This pervasive indecision is dollar bearish. No ifs, ands, or buts. It's not determinative, but it is amazing how in a bull or bear market, an accumulation of news and data can paint a picture that can extend and prolong a trend.

For now, dollar bearish (weak dollar) trends are said to be good for the American stock market, at least as priced in weakening U. S. dollars. The stock market averages have risen 7 months straight. Looking Ahead After 7 Consecutive Positive Months is worth a read. A quick summary of it is that historically, optimism has been the generally correct strategy after such strength.

I would add to those who read it that the current period reminds me of 1975, and per the linked article, the one horrible month following 7 consecutive up months was indeed 1975.

Finally, it is not breaking news that Ken Lewis is leaving BofA as CEO at yearend. He may be facing criminal charges. Such a legal situation, which has not happened yet, would not be dollar bullish, either. Readers who want a hard-edged take on the Lewis situation may want to check on Mish at tomorrow; with no knowledge I suspect he will have a hard-hitting post. In the past, he has been all over this story. His point of view in the past has stood in contrast to that of the MSM and may once again be worth considering.

Finally, for people who think that an individual company's stock price means anything, consider CIT. Simply by following through on its pre-bankruptcy actions of a month or two ago, the stock fell 45% Wednesday and may be worthless. 16 months ago the stock was "worth" $60/share and now is trading slightly above $1/share.

Anyone who looked at the longer-term chart of CIT would have been warned that the major trend was down.

The dollar may be at its all-time bottom and gold may be at its all-time top, but there is no evidence of that; au contraire. Gold may have problems over the next 4-6 weeks as it laps the decline it suffered into November 10 2008, when it finally sold off during the massive liquidation in all asset classes except Treasuries and other such issues. But the current ease at the Fed and the Afghan disarray first at the Obama White House and now the Gates Defense Department are gold-friendly. The potential for a melt-up in gold must be considered. The same is true for stocks, but gold is in a clear structural bull market and stocks are in at best a structural neutral market despite having outperformed gold the past half year.

Gold remains the friendliest trend EBR can see.

Copyright (C) Long Lake LLC 2009

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