The Anti-Dollars are at New Historic Highs: What it Means fo

Joined : 23 Dec 2007 Posts : 241 Location : Nigeria

Today's commentary is by Sean Hyman, Currency Director and editor of The Money Trader.

Good Day Currency Traders!

On Wednesday, oil finally hit its much anticipated US$100 a barrel price. And on the very same day, gold soared to a historic high of US$860 an ounce Shocked

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That's two historic highs to kick off the first trading day of the year. Wow Exclamation

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In recent years, both gold and oil have tended to head in the opposite direction of the U.S. dollar. The reason: Both commodities are priced in dollars. So as the dollar sinks to new lows, it pushes both gold and oil higher because it costs more dollars to buy them.

However, what's interesting is that as these two shot up to historic, all-time highs, the dollar didn't crash. Technically, the dollar SHOULD have busted through its 30-year lows. But it simply didn't.

What does this mean? For starters, it shows that a lot of the bad news has already been priced into the beaten down buck. So yes, we're experiencing an economic slowdown in America. But the buck may hold up better than we think.

So if the Buck Does Hold Up,

What Will Fall During this Slowdown?

The first thing to go will be U.S. stocks. Why? Corporate earnings can't hold up their momentum during an economic slowdown. And corporate earnings drive stocks higher, so slow earnings equal dropping stocks. In fact, companies may soon begin to layoff more workers this year as the economy slows down demand Crying or Very sad

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How do I know this? Well we just got a manufacturing report earlier this week that showed a contraction in that sector of the U.S. economy. Then the ADP employment report showed that there were about 130,000 LESS people hired this past month over the previous month.

Also, take a look at all the sectors of the economy that are hitting 52-week lows: autos, airlines, industrial metals, networking, retailers, banks, paper, semiconductors, REITS and transportation stocks.

All of these sectors are hitting 52-week lows as a whole. So traders are already betting on a slowdown. Otherwise, they wouldn't be selling these sectors off like the plague. So the "smart money" knows that a slowdown is in the cards in the short-term.

While other sectors suffer, commodities are going through the roof. Unfortunately, rising commodities just adds further pricing pressure for U.S. consumers. So as gold, oil, soybeans, wheat, rice, etc. rise...it only adds to living costs. This will be compounded further as corporations layoff their employees.

Another Way to Check the Economy's Pulse
Check to see if consumers are spending money more on what they "need" or on what they "want."

If consumers see the economy as speeding along, then they'll spend their income on "wants." But if consumers feel uncertain about the economy's outlook or their own jobs, then they focus on "needs" only.

Let's take a look at the "Consumer Staples" segment of the economy below. This shows U.S. consumers' "needs." In other words, these are the things you need to survive in life.

You can see that corporations that make what we "need" in life are soaring as a whole.

Now, let's take a look at the "wants" by analyzing the "Discretionary Sector" of the U.S. economy.

Discretionary Stocks Tumble

We can see a stark difference between the companies that sell what we "need" versus what we just "want."

Those that sell those "little extras" are taking a beating right now. As I said, this group is hitting 52-week lows.

All this does not bode well for the U.S. economy. As America continues to slow, look for the Japanese yen and Swiss franc to continue to rally against both the British pound and the euro. Traders will continue to sell off EUR/JPY, EUR/CHF, GBP/JPY and GBP/CHF as they see stocks sink even further. So the short sellers of these pairs will benefit as stocks plunge.

This will also be a great way for traders to hedge their long-term stock holdings throughout this year.

Have a great weekend,
Sean Hyman, Currency Director

Making 'Cents' of the Headlines
Foreigners Buy Up What's Left of America

What's Happening:

Over the last several years, the U.S. dollar has fallen against the top 16 currencies. During that time, the cheap dollar has created enticing opportunities for foreign investors. Foreigners have used their "strong currencies" to buy up American corporations as our dollar stands at 30-year lows.

For instance, just in the 4th quarter of last year, foreigners were responsible for 46% of the US$230.5 billion worth of U.S. mergers.

Canada's Dominion Bank used their strong Canadian dollar to leverage their buyout of New Jersey's Commerce Bancorp. Then, Finland's Nokia bought Chicago's Navteq Corp. These two deals alone were worth over US$16 billion.

Turkey's Yildiz Holding AS snapped up New Jersey's Godiva chocolates from Campbell Soup.

Now, Borse Dubai even owns a stake in the Nasdaq.

So in short, Americans no longer own America. Foreigners have come in and bought up chunks of America here and there and now foreigners have controlling interests in many U.S. sectors. When you consider that China and Japan own trillions of dollars in U.S. treasuries, it really gets scary affraid

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What I Say:

But it's America's fault. American policymakers and business owners should be able to manage their affairs properly. If they didn't spend so aggressively, then we wouldn't need foreigners to rescue the country from our own foolishness. After all, these foreigners didn't put a gun to their heads. These companies needed their help.

Citigroup needed cash fast and Dubai's Sovereign Wealth Fund came to their rescue with US$7.5 billion. China's Sovereign Wealth Fund came to the aid of Morgan Stanley with US$5 billion and also to Bear Stearns with US$1 billion. Even Merrill Lynch needed help from Singapore's Sovereign Wealth Fund to the tune of US$4.4 billion.

So you can see that America could have been devastated without these funds' help. However, it's a shame that they even needed them. But the recent horrible mismanagement of funds made it inevitable.

All of this "buying of America" is actually what is supporting the U.S. dollar in this economic slowdown. If it weren't for them, the U.S. dollar would fall even further on these weak U.S. fundamentals.

So not only are these funds saving U.S. corporations, but they are saving the "greenback" too. When these foreigners purchase "America" like this...they are selling their own local currencies and buying dollars before they purchase a U.S. corporation. After all, you have to purchase an American corporation with dollars.

Of course, America does tons of business with each of these foreign economies. If America goes through a slump, they feel it too. So they have a good incentive to help during needy times. Plus, foreigners get to snap up some bargains in the meantime.

In time, America will have to regain the title of "buyer" of foreign companies or it may continue to decline if it keeps its current title of "seller."

So for now, my hat's off to these foreigners who have been such great stewards of their money and in "seizing the moment" to capture some great values.