• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

The US stock market bulls like to talk about 2 things: growth and earnings. We like both, but only when they are accelerating sequentially (unless we see a price that reflects the pending slowdown in sequential growth).

Since market prices don’t lie, we use them as leading indicators for future growth. This is what made us bullish on US equities in June of 2009 inasmuch as it makes us bearish on US equities in June of 2010.

What’s a little tougher to discern is what a weakening US Dollar might do to stock market prices. While most recent history (the last 3 years – see chart) suggests that the $88 level in the US Dollar index is a formidable level of long term resistance (a long term lower-high, going back 30 years), what will be interesting this time around is seeing how the US Consumer reacts to any sequential price spikes in major US Dollar based consumption items (i.e. gas at the pump).

One of the major reasons we outlined as catalytic to calling the stock market crash of 2008 was the Burning of The Buck. A predictable go-to-move by the Keynesians in Washington would be the debauchery the currency in exchange for a hope that the Buy-And-Hope community would buy into the idea that cheap moneys would save the stock market from noticing the US Consumer going on strike (sound familiar? How about 2010 Europe?).

In the most recent three weeks prior to the US Dollar going down, US Consumer confidence in the weekly ABC/Washington Post survey had been improving week to week. The US Consumer likes it when prices at the pump go down. What will be interesting is seeing her reaction to rising pump prices. Last week’s -1% drop in the US Dollar Index fired up the price of WTI oil by +3.2% week-over-week. We’ll get the weekly reaction from the ABC survey on Wednesday morning.

For now, we are short the US Dollar via the UUP. We’re short it because it’s the best way to be explicitly short the tired strategy of the Fiat Fools in Washington. Until they realize that going back to the well of destroying this country’s currency rather than cutting the real problem (debt financed deficit spending), there is no reason for the objective mind to believe that any of the lines of support in the chart below will hold, over time.

What this will mean for the stock market remains to be seen. For the last 3 days, Breaking the Buck’s Third Act has certainly been reflationary. Good for the stock market bull how hasn’t seen a 3-day rally since April? Sure. Good for Americans? We’ll see…

KM

Keith R. McCullough
Chief Executive Officer

Breaking The Buck's Third Act - DOLLAR