Wednesday, November 11, 2009

Dollar Downer…

Hey, you can believe whatever you want about the situation in the world today… there are certainly a lot of opinions being tossed about. Are we in a bull market or in a bear market; is the outlook bullish or bearish? Well, from my perspective, all that talk is just BULL! We have become such a fuzzy society that we can’t see what is and what is not, reality from fantasy.

There is only ONE reality… you can create alternative realities if you wish, but they will live only in your mind as nature only allows one mathematical reality to exist at any given time (don’t get all quant on me about alternative realities). If you want to see the one and only reality, then simply take out your calculator, add up all the debts… your personal debts, the debts of your family, the debts of your town, your county, your state, your federal government, all the corporations, and then add up all the income, THEN you will meet and come to know reality. The rest is simply bull.

Overnight the dollar broke below the 75 level, the last bastion of support prior to heading back to the previous lows in the 71/72 area. The Point & Figure chart still is showing a target of only 63.

The longer term chart has a huge Head & Shoulders pattern with a broken neckline (confirmed pattern) and a target of only 40!

Now, let’s look at some recent charts and do some math. If you look on the following three year chart of the dollar (candles) with the SPX (solid line) in the background, then you can see that the dollar made a low of 70.70 back in March of ’08, one year prior to the low in equities. The last time the dollar was at 75, the SPX was at 1,300. Today it is at 1,100, a 15% decrease in equities for the same dollar level. You can see that the current inverse relationship does not always hold.

Now, when we look at correlation since the March lows, the relationship has been inverse and it has been nearly perfect. In that timeframe the dollar has lost 18% of its value (a tax on everything you own), while the S&P has gained 65%. That’s a leveraged advantage of 360%, or for every point lost in the dollar, roughly 36 points are added to the S&P 500 (33 S&P points per dollar point over the past 9 months).

Now, IF THAT RELATIONSHIP WERE TO HOLD (it won’t), then when the dollar reaches its P&F target of 63, we can expect that the S&P will be at 1,532! When it reaches the H&S target of 40, it would be at 2,360!!

Guess what… that’s NOT going to happen! Here’s why. As the dollar continues to plunge, the amount of goods that consumers can buy goes down for a given quantity of dollars. The only way consumers can continue to buy the same or more is if their wages keep up with the decline. Wages have been FALLING because we don’t make anything to mention but derivative products anymore, and overseas workers still earn less and thus arbitrage wages downward. Thus, the conclusion is that as the dollar continues to plummet, at some point stocks will plummet because earnings will not be able to keep up. Do not buy into the hype that a falling dollar is good for exports and that corporations will do well – that’s only true to a point and only for a few companies who do the majority of their business overseas. It is BUNK for the market as a whole.

So, watch these levels, and watch the EUR/USD relationship. It went above 1.50 this morning, but then collapsed back beneath. That is a very important psychological level:

And once again LITTLE Timmy Geithner flaps about a strong dollar policy. Again, more bull, but the dollar is up today. They do know what a dollar crash would do to the economy and you never know what their little immature brains will concoct. They do have the power to manipulate this relationship… they can pull liquidity, manipulate interest rates, and they can even attempt to balance our impossible budget. So, don’t count the dollar out entirely yet, something’s going to give soon, either the dollar gives, or equities give… the distance between the rock and the hard place is getting smaller by the second.