Falling Dollar, Rising Market
Research for Online Investors

by John Dalt

9/29/10

The end of the month looms and we wonder, what happens next?  The market has risen almost 9% in September, one of the best one month gains in years.  Before you start high-fiving your wife tonight, you may be interested to know the UUP ETF lost 9.5% in the last month.

The USD dollar index started the month just over 83 and is closing the month at 79 for a 5% loss.  Wow, at this rate it would take two years in a ten-year treasury to make back ONE MONTH OF LOSS in purchasing power.

If we want to look behind the curtain of the last months rally, look at the value of the dollar.  Look at the 50-day and 200-day moving averages in the chart above.  The 50-day moving average is ready to cross below the 200-day average.  Regular subscribers will recognize this as the “Death Cross.”  Technical analysts interpret this as a precursor for more weakness.

Don’t be fooled that people in Washington are upset about this.  They are not.  The Fed is doing their best to encourage it.  This is what Quantitative Easing does, print more money and make the existing money worth less.

The U.S. House of Representatives is set to vote on a bill today to declare China’s Yuan exchange rate a “trade subsidy.”  I don’t doubt that it is, but be careful what you wish for.  You might get it.  The Chinese have tied the Yuan to the dollar since the credit crisis began in the summer of 2008.  This has actually provided stability to currencies world-wide.

On June 19 the Chinese allowed the Yuan to adjust daily.  This followed the U.S. congress pressuring the Treasury Department to declare China a currency manipulator last spring.  The Yuan has gained approx. 2% in the last three months against the dollar.

The dollar has fallen over 11% against a basket of other currencies since early June.  The Yuan has fallen against the same currencies.

This means other countries are disadvantaged against the dollar and the yuan.  Last week, Japan intervened in currency markets for the first time in six years.  They sold Yen, as it was reaching levels that made their exports too expensive in other currencies.

What would happen if the Chinese let the Yuan move higher?  It would disadvantage their exporters with U.S. bound goods.  They could let it appreciate five or ten percent against the dollar, and be in the same place they were in June with the rest of the world!

The Chinese may be ready to grant our wish, and we should hope they don’t.  Could it be the only support the dollar has is the Chinese Yuan?  If the Chinese say goodbye, sayonara, hasta la vista, what happens to the buck.  It plummets.

Bloomberg reports that Yu Yongding, a former advisor to China’s Central Bank observed that “I think we are one step nearer to a U.S. dollar crisis.  Such a huge amount of debt is terrible.  The situation will be worsening day by day.”

We don’t know what advice to give as we are short the market and gold in SwingTrader because:

• Business economics haven’t changed.
• Europe is a mess.
• Our political situation has not changed; the socialists are still in charge.
• Bubbles always burst.

We are managing our positions with discipline in our investment portfolios, but this is not a time to be brave.  We think the September rally is a giant head fake.  It is kind of like a straight level section of track on a roller coaster.  Designed to suck in over-confident retail investors, and then vacuum the money out their accounts.

The gathering storm over currency exchange rates give us pause.  We see a future with a lot of volatility, and wild swings in both directions as traders and investors try to understand the ramifications of the changing landscape.  Hold on, next month will not be a repeat of September!

Sources for today’s MarketToday are Reuters and Bloomberg.

To the mailbag:
I was curious whether you felt the newsletter was becoming a bit contentious or adversarial in nature politically speaking a few months ago. It seems the tone has changed ---paid up subscriber D.F.

John’s reply: I have just tried to beef it up with more economics and investing themes.  Actually I enjoy the back and forth, and think it adds to the interest in reading MarketToday.  But, our job is to help our subscribers be better investors. I try to use a drier sense of humor by adding "comments" in the article as opposed to opinion.

A very high percentage of our customers are conservative, because that trait seems to go along with acquiring some assets.  Imagine; hard work and responsibility go along with making money!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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