Tectonic Shift in the Dollar
Today's Tedbits is abbreviated due to illness in the Family. We ask for your forgiveness, the next issue will be extensive.
Wow, the dollar got clobbered over then Thanksgiving holidays, when US traders were at the dinner table and US banks were closed, big players from around the world hit is hard. The Peoples Bank of China was warning against the risks they and the rest of our Asian Creditors had with their large dollar reserves. The accumulation of which has virtually stopped from that part of the world. They are no longer buying treasuries, or keeping their new dollars in reserve. They are buying assets that are denominated in other currencies as treasuries are rallying here (i.e. going up, causing long term rates to decline). Who's buying US treasuries? Could it be the Federal Reserve?
As housing is cratering here in the US and the "ARM"ageddon resetting of over 1 Trillion dollars of Securitized mortgages resetting is in full swing. These home owners/speculators suffer the shock of higher payments (some borrowers are paying up to 40% of their total income on their mortgages), when they go to refinance they are finding the door shut. As the lending institution that issued the mortgage will not write the new paper. Why? Because they packaged it up in securities and sold it to investors. And as the properties have typically gone down in value and the property is worth less than the mortgage amount. Why would any lender take that bombshell mortgage off somebody else's loan book and move it onto their own as the borrower is highly likely to default?
To compound the problem for the Government, the 800 billion of these mortgages are GAURANTEED by none other than Fannie Mae and Freddie Mac, with quasi government guarantees. These borrowers are in hell, with bankruptcy a rapidly approaching freight train. And the federal government is on the hook to the mortgage securitized mortgage holders of the Fannie/Freddie paper. Who is the only option for a hoped for salvation from disaster? The "Greenspan put" is the conclusion dollar holders have come to. Fully expecting Bernanke and the FED to ride to the rescue as Greenspan did after the crash of the NASDAQ, and the bear market in stocks from 2001 to 2003. Only this crash affects mom and pop who bought the housing market as a "can't lose" investment. Remember those magazine covers and articles touting real estate from 2003 to 2005. A far broader swath of the public is now involved in this crashing market. And as the economies Europe, Russia, the Pacific Rim and Asian economies are roaring, rates are set to rise abroad.
So the dollar has tipped its hand in the last week and broken down from the consolidation its been in since January 1 2005. Initial projections from the technical patterns (see chart below), and there are many of them saying the same thing, is 72, a 14% decline from the breakdown at 84. There is a double top, a triangle and a head and shoulder on the daily charts all saying the same thing, "GET SHORT".
Well if you look closely the dollar hasn't been below 80 for over 15 years!!!! Gold is confirming this move as well as it has activated technical patterns targeting the 735 highs from May. There will be panic when it breaks this long standing Threshold. It is very early in the move but it is going to be a monster.
Technical analysis of the S&P 500 by Garret Jones
"Financial Genius is a short memory in a rising trend."
John Kenneth Galbraith
This will be a short and quick Alert. We have commented that the market has been successfully climbing a wall of worry. The sentiment finally reached levels serious enough to warrant a correction right after Thanksgiving. The bulls were up to 58.5% (up from 56.4% last week and 52.1% the week before) and the bears remained unchanged at 22.3% for a differential of 36.2% -- a fairly large spread.
Let's get right to the chart and see what things look like: You can see the wave count that I assume we are tracing out from the June low.
It appears that we have finally completed a third wave up and are now entering into the A-B-C corrective pattern of the 4th wave. This would imply one more thrust higher and then the largest correction of the pattern. The peak on November 22nd produced a divergent sell signal that was confirmed by a VIX sell signal on the daily charts. Assuming this pattern is correct; I would expect a low right here (or in the next day or so) followed by a rally for about a week. This should be followed by a sharp sell off that tests the recent lows or breaks them slightly. I would expect this to complete around the middle of December. This should launch a 5th wave rally and provide the potential for a Merry Christmas for traders and investors.
All the best,
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In conclusion, for the dollar it's a high wire game, it gapped on the charts over the holidays and is overbought but held the gap and barely retraced. It is now off to the races. I agree the highs in stocks are not yet over, as we need to see a new high with failing momentum. Dollar holders are unloading by buying stocks, which are a claim on something that can't be printed, a share of a company. They will buy more now that the dollar is falling they want to hold anything but a dollar. Have a great day and thank you for reading Tedbits. I will do a tour de force next time, housing is far worse than it appears yet. If you like this please send it to a friend or visit our website at www.traderview.com, subscriptions are Free!!!