Last week’s historic actions by the Fed – and action on Wall Street – pose questions inquiring minds certainly want to know: Have the dollar and U.S. stock market reached a bottom and have gold, oil, and industrial metals hit a top? 

Let’s start with the dollar. The dollar has been under pressure for two big reasons: a chronic trade deficit and a series of Fed rate cuts which have dramatically increased the spread between U.S. interest rates and many other countries in the rest of the world. For the dollar to have reached a bottom, one or both of those fundamental factors would have to improve. 

Rule out any improvement in the trade deficit large enough to matter for the dollar. However, the interest rate differential argument may carry some weight, particularly for the fate of the dollar/euro pair. Indeed, as the European economy stalls, look for the ECB to possibly cut rates. If the stall is bad, look for a very significant downward lurch of the euro. 

Now what about the U.S. stock market? A stronger dollar would draw funds back into the U.S. stock market and help prop it up. But any real bullish move would have to come from an economic forecast that showed a shallow recession and relative quick rebound. After all, stock prices are simply a reflection of the expectations of a future stream of earnings and only will rise if expectations improve. 

Right now, there are some few voices insisting things aren’t as bad as they appear – the UCLA forecast for one which says there ain’t no recession. However, ECRI just called a recession and sees a dim outlook ahead. So it’s anyone’s guess, but a key ingredient will be whether the housing market finds its own bottom soon and whether the credit contagion has now been contained by Helicopter Ben’s money drop and bailout. 

So how about gold? It’s strictly an inflation and dollar hedge. If the dollar stabilizes and the recession deepens, you damn well better be short gold. 

The fate of oil more broadly hinges on the decoupling scenario we’ve talked at length about in earlier newsletters. Oil will hit its top if and when the Chinese economy begins to show signs of significantly lower growth. Ditto for industrial metals. In other words, if decoupling fails, shorting oil and metals is a lot better side of the trade – the broader secular bull market in these commodities notwithstanding. 

QUICK TAKES

1. Nobody cares if Bill Richardson endorses Obama. And he should have been a lot more loyal to the hands that fed his political ambitions. 

2. The failure of Michigan and Florida to resolve the Democratic delegate issue augurs a very messy convention. 

3. China is totally blowing it with its handling of Tibet. Trying to spin the Dalai Lama as Che Guevara is just plain stupid. 

4. Hank Paulson is the most short-sighted tall guy I’ve ever seen. 

5. Where’s Paul Volcker when we really need him? 

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

The Market Edge Market Summary from www.marketedge.com 

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
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DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.