Dollar Bull Market

It is amazing to me that so many people continue to ignore the obvious. That is the present, ongoing bull market in the US Dollar. Yes, that is the US Dollar that you and I use every day. It may be the worst of many paper currencies or it may be that dollars are becoming more valuable as deflation takes home. But as the accompanying chart shows, the USD bottomed back in 2008. Yet, in the last two years most observers have been in denial of the fact. While the USD may be overbought in the short term and vulnerable to a pullback, look for any such weakness to be transitory. The monthly chart bodes well for US Dollar bulls like me.

China Revisited

Following up on yesterday's entry, Bloomberg is reporting that China had a trade surplus for the month of April. A big change from a trade deficit of the month before. But also a big decline of 87% from a year earlier. Could the Chinese economy be rolling over? The Shanghai Index seems to indicate so, being double digits off its high. Imports have been rising twice as fast as exports it appears. How much longer is this sustainable? A few months, maybe. An interesting quote is this: “If the yuan rises 3 percent, where’s our profit? Many, many factories will close.” Notice how small their margins are. A 3% change in the exchange rate wipes out their profit! There is no room for error in the Chinese "system"! Just as with the electricity generation of the country's dams, business is operating on razor thin margins using massive leverage. That is how they have been keeping the 10% growth going year after year. It may not be a Ponzi scheme like Greece, but it still is unsustainable, especially when their customer are running Ponzi economies. Read the article here:

China's April Trade Surplus Shrinks 87%

Chinese Water Torture?

Not exactly what you might think... but the website oilprice.com has an interesting piece about drought (humankind induced?) in China. This echoes my thinking every since I visited China twelve years ago, before the Three Gorges Dam was built. While it may be a good idea to build dams, the system should be less concentrated and managed more with the risks involved in mind. Instead, a top-down, "Central Committee knows best" strategy has been pursued, which ironically may have made China MORE not less vulnerable to drought and energy shortages. Read:

China's Hydroelectric Sector Crippled by Severe Drought

In one province, the article claims, a full 90% of power production has been crippled because of inadequate water levels in the reservoirs. So they have turned to generating power with extra coal burning! And there is a drinking water shortage. And in China, even in the best of times, there is a shortage of clean drinking water. Critics have charged that water has been discharged wastefully because it is required of dam operators to maximize power production. While I don't think that this drought will cause famine or chaos, at least not yet, it is indicative of the dangerous game of overproduction that is being played in China, in order to meet the demands of the West's overconsumption and the Chinese leadership's desire for growth to quell social unrest. Our global economic and yes, environmental system, in out of balance. Building more dams and producing more power in order to produce more goods to ship to the US, who will produce more debt which the Chinese will finance never was a sustainable economic model and the limits will soon be reached, if they have not been already. I am not against development. I am not saying that more dams should not be built and that more power should not be produced. I am saying that the system should be rationalized to produce maximum productivity. This will not be done with Beijing and Washington, DC pulling the levers to maintain global growth. It will happen when control is returned back to the local level. It will happen. It could happen now in a relatively orderly fashion, but I fear that the present madness will continue until power is forcibly wrested from the center violently or because the center collapses under the weight of its own folly. It is likely that we will see whether and how it will happen in the next two years.

Dow Test Imminent?

My best guess is that we are setting up for a test of the recent lows. Since last Thursday's action was so volatile and the activity was of suspicious nature, it is difficult to pick a specific level. So I am going to cop out and pick a range. That range is 9,800 - 10,200. As the chart above indicates, the moving average is around 10,200, there is the round number support of 10,000. Resistance has been defined in the last few days above 10,800, so at the moment, risk/reward is around a 5:1 to 9:1 ratio. The bears are still in control, don't believe the broker propaganda. The weekly chart is NOT oversold and shows support around 10,100. The daily is oversold and just needs a bullish divergence to turn short-term bullish. So I plan on playing from the short side here looking for a test of last week's lows. This could lead to another rally attempt, with the current level being a natural resistance level. If this occurs and leads to another leg down, support is not evident until 8100.

Northern Exposure

With the warmth of spring, it is safe to consider trekking north to enjoy the virtues of the great frontier that is known as Canada. When you have newspaper articles like the following from the Feb. 8 WSJ, you know that a peak is close at hand...
"Mr. Gray, the Toronto concierge whose home deal fell through at the end of 2008, is looking again for a condo, although he's had to increase his budget to around C$350,000, from C$250,000. Ms. Girard, the housewife in Red Deer, says she hopes to buy a seventh unit in a few months—after she pays down enough of her credit-card debt to qualify for another mortgage."
Cheap mortgages have helped to blow this bubble, as there are a high number of adjustable mortgages currently in the 2-4% range, which will reset in the next 3 years. With a 0.25% short term rate, money is cheap in Canada. But for how long. The Canadian Dollar shows an eerie resemblance to US stocks. Could it be that the commodity economy of Canada is highly dependent upon US growth? It makes sense. And how would a double-dip in the US affect Canada? Negatively. As would a slowing Chinese economy. Oh! By the way, did I mention that the Shanghai Index looks toppy? Slowing Chinese economy, lackluster real growth in the US... Not good news for commodities and countries that depend on exporting them, like Canada. Maybe the next real estate bust we should be worried about is not the one in our own borders. But the one above our northern border.

Where is the Volume?

On the downside, that's where!
Thursday the NYSE saw 11B, Friday 10B and today only 7B. Similar thing for the Nasdaq.
Thursday was not a "fat-fingered trade error". Today was not successful intervention by the ECB. It is best to stop believing propaganda. For your own financial health. Thursday was an early warning of what can happen when bids are pulled. This stock market has been pumped up by Fed stimulus. As long as they continue to throw money at it, they will keep it up. But it is not practical to keep pouring money into the stock market. At some point, if they continue to do so, interest rates will rise and a self-defeating vicious cycle will be unleashed. It may take a year or so for that to develop in the US, but I have my doubts that it will take that long...
The 1900 level on the NDX must hold. So it is no wonder why we are seeing such a struggle to hold at these levels. Will the ramp job hold? Or will it be a 2-3 day wonder? We will know by the end of the week..

Dollar Bull, Pound Bear

What a difference a month makes. Bulls have had their horns shaved a bit. And the bears have gotten a little more ferocious. Everyone is sighing with relief as the crisis has passed. Thank goodness for the ECB !!! Hip Hip Hooray! Hip Hip Hooray! But wait...

What if it isn't over? How could that be? Surely the most powerful men and women of the most advanced countries in the world must be in control? It couldn't be possible that events are spinning faster and faster out of control of the strongest wills and brightest minds that the world has to offer... Ummm, could it?

Take a look at this:Or, for a slightly longer term view, this:


By the way, the Euro charts are very similar. And they both have given back ALMOST ALL of their gains today! The ECB monetary floozies pledge 1T Euros to "do whatever it takes" to hold the Euro together and the Euro and Pound barely budge! That is a vote of confidence!!! Ha! Now the British Pound MUST hold here. Notice that it is sitting on a level that has been touched three times. If this level of 1.48 against the USD does not hold, we could see it 20% lower in a matter of days. Right now, I would give this a 65% chance of happening. Those with exposure to the British Pound need to be careful. The odds are that the European currency crisis is not over.