This note was originally published at 8am this morning, November 29, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The strength of a nation derives from the integrity of the home.”
Slowly, but surely, the US Dollar is re-capturing some credibility. Yes, we get that credibility amongst the Fiat Fools is a relative measurement. But for now, with the Europeans doing their best to become Japanese, we’re long the US Dollar and we’ll take what we can get.
The strength of a nation is not derived from Piling Debt-Upon-Debt. The strength of a nation is not derived from professional politicians funding long term liabilities with short term fiat paper. The strength of a nation derives from the integrity of a country’s fiscal position.
I am well aware of the deficit and debt risks in America. I am certainly not saying they have gone away. That said, everything that matters in global macro happens A) on the margin and B) relative to everything else. What global currency prices are telling me now is that a strong currency at home could be more than just an immediate term TRADE.
Last week the US Dollar Index closed up +2.37% and +5.84% higher than its November 4th YTD low. That was the 4th consecutive week of gains and all of a sudden the Buck is Breaking Out above both its immediate and intermediate-term TRADE and TREND lines. Critically, what was resistance for US style fiscal conservatism is now support:
- TRADE support = $77.89
- TREND support = $79.71
As always, trending currency strength needs multiple factors of support - not the least of which are other foreign currencies weakening. When managing foreign currency risk, never underestimate the power of what’s going on in the rest of the currency basket.
In the last 3 weeks, the Euro has dominated headline news. This morning, “news” of an Irish bailout comes with the associated political nonsense. France’s central banking Fiat Chef went as far as to suggest that ze package “is very well tailored and will restore competitiveness in Ireland.” He’s got to be kidding me. Ask someone in Ireland how competitive they are feeling this morning.
Euros bulls are obviously having trouble swallowing that weekend old French toast. After losing -3.6% of its value last week, the Euro is trading down another -0.61% this morning at $1.32 versus the USD. It’s broken on both our TRADE and TREND durations:
- TRADE = $1.38
- TREND = $1.33
All the while, there is this large island of compromised Bureaucrats called Japan that is seeing its currency weaken as the #1 driver to economic-hope slows to a screeching halt. For the month of October, Japanese exports were effectively HALVED in term of their sequential (monthly) growth rate (+7.8% OCT versus +14.4% in SEP). As Asia slows, Japan slows… and these are the globally interconnected days of our lives.
Euro DOWN + Yen DOWN = US Dollar UP. Cool. Now Americans need to have the political backbone to maintain the integrity of the home currency. Can we do it? Yes, We Can.
I’ve got no problem cheering this Buck Breakout on. Yes, it will equate to immediate term US stock volatility, but I’m already proactively prepared for that. I cut my position in US Equities to The Ber-nank’s favorite exposure (ZERO percent) before the current 3% correction in US Equities started to take hold and this morning I have a 64% asset allocation to Cash waiting, as les bulls like to say, on ze sideline, eh.
The Volatility Index (VIX) was up a monster +23.2% last week to 22.22, so at least we’ve dropped some of the levered-long kids off at the pool. Volatility is a concurrent measurement of emotion and can quite often be a contrarian indicator of future performance. Naked swimmers may want to bear that in mind as the price momentum tide rolls out.
Strong Dollar nips The Ber-nank’s global inflation race in the bud. Strong Dollar also helps drive up short-term interest rates on my hard earned personal and corporate savings accounts. No, no, Mr. Hard Core Leverage Man, that doesn’t help you too. Strong Dollar helps men and women who are debt-free run strong like bull all over you when you are least expecting it. And this is where the true strength of this Nation lives.
My immediate term support and resistance levels for the SP500 are now 1173 and 1197, respectively. I remain short the SP500 (SPY) in the Hedgeye Portfolio.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer