This week in Barrons - 2-7-10

This Week in Barrons – 2-7-10:

I put a dollar in a change machine. Nothing changed … George Carlin
Several people have written me about the dollar - Could a sudden sharp decline in the value of the dollar destroy a foreign government’s wealth and make them a curiosity and not a problem. Alternatively, can foreign debts owed by America lead us to a dollar crash that cripples the U.S. economy. It is likely that the answers to these questions are no and no.

The future will soon be a thing of the past. … George Carlin
For at least a decade, economists have been anticipating a sharp fall in the dollar – except for the fact that: (a) Rich private foreigners value having large chunks of their money in the U.S. as a form of political risk insurance. (b) Foreign governments continue to increase their holdings of dollar-denominated securities to make sure that they can keep exporting to the United States at a pace that allows for export-led growth and thus produces domestic social peace. And (c ) the role of the dollar as the key currency of the international monetary system creates a large demand to hold dollars as reserve stores of wealth. As long as these three factors keep operating, the value of the dollar will remain relatively high. Moreover, the fact that the United States has borrowed and its debt is denominated in its own currency makes a world of difference. Huge debt in your own currency is different; the United States can always create more dollars and its value is everyone else's problem.

If the cops didn’t see it, I didn’t do it. … George Carlin
Now – the real issue is the thinking that “as long as the dollar remains the centerpiece of the world economy.” Certainly the dollar is worth no more or no less (relative to other currencies) that it was back in the late 1970’s. The issue is the ‘ripple effect’ of one dollar ‘spent’ in 1978 vs today. For example: if $1 was spent to purchase a pack of chewing gum back in 1978 - it's conceivable that five different companies could have enjoyed the profits of a sale because you purchased five packs of gum. This would figure into the various company plans to hire and possibly expand production. In 2010 it’s possible that our lonely dollar only buys 1 or No packs of gum, and this difference is NOT insignificant. The velocity of money (how often it changes hands) tends to be quite retarded when inflation rears its ugly head. You see, although the U.S. dollar’s standing relative to other currencies (index) remains identical to 1978 – the purchasing power, impact, and velocity of our money have deteriorated by hundreds of percent since 1978.

Soft rock music isn’t rock, and it ain’t music. It’s just soft. … George Carlin
And the line: “As long as the dollar remains the centerpiece” – well much has changed. In 1978 we were the world’s biggest Creditor – today we are the world’s largest Debtor. Today, each dollar printed comes with an ‘interest due’ note attached to it. The interest on our debt is now the fourth biggest budget line on our balance sheet after defense, Medicare and social security. Now consider that almost 51% of our interest goes to foreign holders of our debt, and one might pause to wonder: "How long can this go on?"

Well – just this week, a lot of our market's wicked movement was in response to the Greece – and their potential economic nightmare – and let us not forget Portugal, Ireland and who uncovered a huge amount of loans to people with no ability to pay them back – and then there is Dubai?

The Market:
Swimming is not a sport. Swimming is a way to keep from drowning. That’s just common sense! … George Carlin
Re-hashing the jobs report - does anyone really think that we only lost 20,000 jobs? Not when 480k signed up for initial jobless claims this week, 460k the week before, and 445k the week before that. One has to wonder why almost 2 million folks a month need INITIAL unemployment if we only lost 20,000 jobs? A much more intriguing question is: "What about that initial reaction?" We had already fallen from 10,723 to 10,060 in general market weakness, and then Friday we fell another 167 points at one point during the afternoon – and then the ‘plunge patrol team’ appeared in the last hour and took us from down 167 to + a few. Now was this (a) a simple correction, (b) the Greece ‘effect’, or (c ) the dollar’s strength - and the answer is: it’s all of these and more. The troubles in Europe are real, very real – put that with Obama’s budget, and his passion to punish the same bankers that got him elected, and you have a real war between Wall Street and Washington, D.C. going on. After all, we have November elections coming at us this year and the Democrats are going to push forth as much stimulus money as they can possible between now and then. You can't push trillions in the pipe without better-looking economic statistics showing up somewhere. Could we see the market regroup, and push ever higher, threatening the highs we saw at 10.7k – sure – it’s possible. Whether we can rally to that degree will be answered around Wednesday of this coming week. A reversal, and any news out of the G7 about helping Greece, we could easily tack on another 150 points Monday. But a reversal and a one-day spurt higher doesn't a trend make. Don't forget, despite the market recovering those 167 points, the market only "gained" 10 points over Thursdays close. However, I think there is some momentum over the recovery, and I think that I will try and play it to the long side. But I am not going to be even a bit surprised if we're looking at a one-day wonder and we're back under 10K in a couple days.

Think of how stupid the average person is, and realize half of them are stupider than that. … George Carlin
My feeling is that we might be entering a period of lower highs. For example: the market runs up to say 10,600 – then after a big dip pushes up to 10,450 – dips again and then runs up to 10,200 – and so on. This rolling pattern and chop could take us right on through the whole year. Could I be nuts and we simply blast over 11K – sure. There's a ton of cash out there, and given the government’s spent $12 Trillion already – what’s a couple ‘hundred Billion’ among friends?

The IQ and the life expectancy of the average American recently passed each other in opposite directions. … George Carlin
Time will indeed tell, but every day I see more and more cards falling in this global house. Maybe we get higher, but I’m in the camp that we’ve seen our highs for the year and we will do the rolling chop to lower as the year progresses. I am going to try and lean long into the market Monday and see if this turns into a decent bounce. I won't feel that great about it until Wed, and by then we'll know.

TIPS:
We’ve sold out of everything – and are on the way toward finishing selling our 401k’s as well. I shorted the SPY’s and the DIA’s and covered on Friday. We’ll see what the bounce brings us on Monday.

I will buy SPY’s on a move over 107.00 – with a stop @ 106.80.
I will buy DIA’s on a move over 100.45 – with a stop @ 99.90.

Until next week – be safe.

R.F. Culbertson
rfc@getabby.com