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8/25/2008

An Important Couple of Days

6:30AM New York time. Essentially… this looks like it’s going to be a test week for the resumption of the Dollar rally trade. It’s my view versus the Dennis Gartman view. He was a guest on CNBC’s Fast Money on Friday where he reiterated his call that the Dollar has put in a meaningful bottom, is in the midst of a meaningful rally, and the tough trade (meaning the right trade), is actually to be short gold. One of Dennis’ points was that the retracement last week off the Dollar highs didn’t even get the Euro back to 1.50. If the Dollar has real selling interest, it would have at least bounced to 1.52-1.53. The fact that it didn’t, demonstrates that there are still large numbers of corporate and passive money participants who are hedged short the dollar. And their desire to cover those positions will push the Dollar higher still. I can at least appreciate to pragmatic explanation. At least he didn’t try to sell me some handpicked econ-mumbo-jumbo that would justify a long Dollar position. It IS about positions… it IS about capital flow.

So there really isn’t a whole lot to say other than… let’s see whose right. I myself am going to play this thing all the way through. That means I will probably be adding to my position later today, or, more likely, sometime tomorrow. We had four up-trading days off the lows. The market is entitled to (and should actually be expected to) a couple of days back the other way. The other side of the Dennis’ argument for poor price performance is my argument; I think it will be telling if the Dollar is unable to go through her recent highs, instead… running out of gas on the upside. That will result in either a lower high for the Dollar Index, or a minor failed new high… both good technical behavioral signals I would choose to buy and play against from a risk standpoint. Gold has the advantage (so far), of still being quite a distance from the recent $788 lows. That ability to hold is also a double-edged sword. A failure of the Dollar and resumption higher would mean Gold has some catching up to do. It would probably get really crushed for a couple of days. A hold would mean gold has more underlying relative buying interest to it.

On the intermediate term… for the next quarter of so, I am still a bit uncertain as to the macro direction. The dollar has had a huge rally back, taking the commodities down too. For much of this year, I had thought the Dollar was way overdone on the downside. The recent rally has done much to correct that. Is it enough? Is the correction done? It certainly went a long distance price-wise, but really hasn’t eaten up much time. I would feel a whole lot better if there were a lot more Dennis Gartman’s on board, touting a bottom in the US currency. And while I feel pretty good about this trade below 1.50 Euro or $820 in Gold, I’m not sure how I would feel if the Dollar was to sell back off to 1.55 and Gold were to rally back to $900. Fundamentally… I’m not sure the resumption of the big secular bull market in commodities can resume while the pain of recent high prices in food and energy are still beating on demand and weakening the global economy. While the leading edge of commodity cost may have turned down, that lower cost has not worked through the pipeline, and most buyers of finished products are still paying high and rising prices for goods… and reacting accordingly. Ironically… I think the best thing for commodity prices would be a bottom and upturn in the US housing and stock markets.

Longer-longer term… the planet still has a demographic juggernaut to contend without any meaningful alternative to our current energy/food/potable water supply issues. The question, as always, between these three time frames is timing. And while I love to discuss them and throw ideas around with interested parties, the reality is; if I don’t have it right/survive the very short term, I certainly won’t be around for anything longer.

This column can alternately be found at CT-Oysters.com (http://www.ctoysters.com/AM%20Market%20Column.htm). The site will be forever under construction, but there is a growing amount of information on shellfish aquaculture, environmental impacts, history, and weather.

Steve Plant

FXA

Please email Steve Plant with any questions or comments

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