The Next Market Move, A Real Decoupling, Investing in Asia, Gold Forecast and More!

  Heading into trading this week, the big story is still the greenback. This morning, the dollar finally took a breather from its recent rally. The dollar index retreated from Friday’s high of 77.2 to around 77 on the dot as we write. But looking at the bigger picture, the dollar has had a remarkable run:

You’ll notice the sudden surge in the dollar index even overshadows its brisk decline in February and March, when the world watched Bear Stearns crumble to bits.

That move was rooted in some scary fundamentals… U.S. financials were shedding billions by the day, the stock market was tanking, the housing market was plummeting deeper into the abyss, government was barely able to contain the crisis. The move back up, best we can tell, is rooted mostly in the “Europe is worse than you think” thought process. We’ll let you forecast for yourself where the dollar will likely go from here.

  “This new market environment has been challenging for short sellers,” notes our resident shorter, Dan Amoss. “The “hot money” herd, whether it’s day traders or computer-driven hedge funds, is in the process of unwinding speculative trades that were built upon the assumption of a strong euro/U.S. dollar exchange rate.

“Here’s the current popular sentiment: Now that the ‘euro bull‘ case is unraveling, traders are dumping commodities. Since commodities are falling, many are starting to believe the Federal Reserve won’t have to tighten monetary policy to ‘fight’ inflation. Therefore, you should buy financials and short energy, gold and commodity stocks.

“This is nonsense. The commodities down/financials up trade is not likely to go much further in terms of price. So let’s stick with lasting trends — the trends that are supported by sound fundamental research, rather than hope.”

If you agree with Dan, check out his latest work in Strategic Short Report, here.

  “I expect the [economic] expansion to remain modest certainly into next year,” said Fed President Gary Stern today, adding to Dan’s thesis. The Minneapolis Fed head told the WSJ that “it will take some time for the head winds to dissipate” in the financial and housing sectors.

  If you weren’t watching the markets last week, fear not… you didn’t miss much. The Dow ended a volatile week with a mere 0.6% loss. The S&P 500 ended last week mostly unchanged, and the Nasdaq managed a decent 1.6% gain over the last five days.

  Thus, we notice small caps and tech have been outperforming the market. Or we could say blue chips and large caps stocks are decidedly out of favor.

“The Russell 2000 is nearly back to where it started the year,” notes Jim Nelson of the The Sleuth. “The Dow can’t say that. But we don’t think this trend is over. If the broader market is able to find support, this could be the start of a small-cap cycle — one that will work over long periods of time. We will surely see some more ups and downs, but this breakout marks the start of what could be a multiyear bull market for small caps.”

  That being said, the CEO of the “ultimate” blue chip is as bullish as ever. GE CEO Jeff Immelt told reporters today that “If you’ve got some cash, if you have a strong balance sheet, this is as good of a time you’re going to see.” Immelt told CNBC GE’s financial sector is making deals this year that will move the whole company forward for the next five years.

“Some of the best opportunities we’ve seen in the last 10 years we’re seeing right now. Assets are cheap.” Of course, it’s his job as CEO to be a company cheerleader, but we’ve been hearing similar sentiment from big businesses with money to burn. We’ll keep an eye out for you.

GE’s boss also said he expects business in China to double by 2010. Immelt forecasts $10 billion in revenue there in the next few years, and for China to become a second home base for the company. "I think the whole focus [in China] on water and the environment, that’s going to offer, we think, big opportunities for us as time goes on."

  “The Sino-Indian trade is still booming,” notes Chris Mayer in a similar fold. Amid all the global downturns and slowdowns, business between China and India is humming right along.
 
“Last year, trade between China and India rose 56%, to nearly $39 billion. This year, that total could reach $60 billion, which is about two years ahead of prevailing estimates. Those trade flows should only increase, as the two each seem to have something the other wants or needs.”
 
“India plans to spend $500 billion on infrastructure in the next five years, for example. One of the big areas of concern is basic electrical power. India needs a lot more of it. One need only spend a little time in Mumbai and watch the lights go dim periodically from rolling brownouts. Recently, Reliance Infrastructure inked a joint venture with Shanghai Electric to make power generation equipment. Suzlon Energy, a wind power company in India, also opened a $600 million plant in Tianjin, China, last year.
 
“These are big deals with high stakes, widening the eyes of even veteran observers on the scene. The Indian companies have big ambitions. Time will tell whether their investments pay off. It’s a five-year proposition, as I’ve said before, with these Indian investments. The ups and downs will have you reaching for the Maalox if you worry about the short term. It’s a market I want to be a part of, though, for the long haul.”

If you haven’t read Chris report on investing in India, it’s a must-do. Check out his free research, here.

  Oil prices are up for the first time in three days today. Light sweet crude nudged up to $114 and change, about $1 higher than Friday’s closing price. There’s a whole myriad of geopolitical items that could influence the oil trade… Iran’s firing missiles again, The Russia/Georgia conflict is still hot, Musharraf is stepping down as “president” of Pakistan.

But really, oil is still a dollar trade today. We saw the dollar back down a bit over the weekend and early this morning, and oil inched up in sync.

  This little lady doesn’t seem to be bothering energy traders, either:

That’s Tropical Storm Fay, the latest bout of inclement weather threatening the U.S. coast. She popped up over the weekend, and has already caused some panic in Cuba and is expected to reach Florida Tuesday. The weathermen say Fay might even reach hurricane strength.

But whether it reaches such speeds or not, Fay probably won’t be capable of pushing oil and gas prices through the roof. But if you’re a commodity trader with positions in orange juice… might want to keep an eye on the ticker.

  Gold is in a similar funk as oil. The spot price took a nasty dip to $775 late Friday, but has since rebounded to around $795.

“The present situation reminds me of August 1976,” reminisces GoldMoney’s James Turk, “just weeks before the Democratic National Convention confirmed Jimmy Carter as that party’s presidential candidate. Gold slid down to $100 per ounce even as the inflation and economic outlooks were worsening. Gold looked dirt-cheap back then, even though its price had risen threefold from just a few years before.

“By the end of 1976, gold had climbed 32.3% from its August low. By the end of Carter’s presidency four years later, gold climbed more than eightfold. I wonder where gold will be at the end of the next president’s first term in office?”

  Gasoline prices just won’t stop falling. In fact, retail gas’s fall is becoming even more impressive than its rise earlier this year. The national average has fallen to $3.74 this morning. That’s 32 consecutive days of falling prices… about 36 cents in one month. We’ll take it.

  “The dollar rally that’s had you befuddled all week is almost certainly driven by massive, coordinated intervention,” suggests a reader. “According to Lance Lewis (Lewis Capital in Dallas), foreign central banks boosted their Treasury holdings by almost $26 billion last week, while the U.S. Exchange Stabilization Fund dropped by 10 billion euros. It is no coincidence that this all transpired while Fannie Mae was collapsing. What better way to inject confidence into the system than forcing a massive squeeze of financial shorts and triggering a simultaneous cliff dive in commodities? It’s an artificial and ephemeral rally that can’t hold. Take advantage of it while you can and load the boat; a sharp reversal is days away.”

  “Regarding your comment about funding Social Security with immigrant taxes,” writes a reader, “my sentiments exactly!! Not that I want to turn a blind eye to U.S. immigration laws that have been broken, but the Republican W. let them in for their cheap labor, and a Democratic O. will legitimatize them as a practical matter of balancing the budget. Clearly, the underground (read untaxed) economy must be brought into the fold to reduce the burden on all of us W-2 schmucks who cannot get away with not filing an annual 1040 with the IRS.”

  “Having more legal immigrants is fine as long as they meet two criteria,” suggests another reader.

“1. They, and any family or others they bring with them, must be young and skilled and major contributors to Social Security and taxes, not recipients.  

“2. They want to be here to assimilate into American society, not create or be part of a foreign enclave. They need to want to abide by American laws and customs, not demand that our culture change to fit the culture that these people left.”

The 5: We can see the sign now: “Welcome to America, leave your tired, old, sick and poor behind. Absolutely, no culture or anti-American influence allowed. Sew all patches on left arm.” Ugh…

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. Keep an eye out for I.O.U.S.A. in the news this week. David Walker, the “hero” of the film, has completed interviews recently with Good Morning America, the Wall Street Journal, The Economist, Newsweek, Time, NPR and many more. Warren Buffett will reveal his thoughts on the film the morning after the premiere on CNBC’s Squawk Box.

Have you bought your ticket yet? We’re only four days away… reserve your seat here.

P.P.S. And there must be a pirated copy of I.O.U.S.A. already floating around. We’re not sure how else Libertarian presidential nominee Bob Barr got his hands on it. He recently endorsed the movie in a YouTube post that you can find here.