This spike may have been caused by a news report that appeared in the Independent today. It states that the Arab States in the Gulf have made secret plans with China, Russia, Brazil and France to stop using the US dollar for oil trading. While this isn’t immediate and it calls for a transition to occur by 2018, it seems to have set the stage for a pretty bad precedent – that gold will jump on these sort of rumors! Lets see if we get any official confirmation of this “news”.

So is this the beginning of the end for the US Dollar? I hope not, but I’m buying some silver and maybe some more gold, just to be safe!

Related Posts

• January 25, 2010 -- Venezuela Devalues Its Currency
• February 4, 2008 -- Why The Government Wants A Weaker Dollar
• October 15, 2007 -- Jim Rogers Backs The US Dollar
• May 12, 2010 -- Gold Closes At Record High
• February 15, 2010 -- Taleb: Everyone Should Short US Treasuries
• November 16, 2009 -- Gold Is A Lousy Investment
• November 9, 2009 -- Gold breaks $1,100: Does It Matter?

According to Lou Basenese, editor of the The Alpha Intelligence Alert, think it’s time to go long the USD.
Here are some of the reasons he cites:

1. Bernanke & Paulson Rediscover “Verbal Intervention.” Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke finally got off their duffs to defend the dollar. Paulson got things started in Qatar on Sunday. Speaking to the leaders of the Gulf oil states, he urged the countries to think twice about abandoning their dollar peg, as “ending the peg is not the solution to the inflation problem.” And Bernanke stepped up today. Speaking, via satellite, to an international monetary conference in Spain he insisted Fed policy will be a key factor, “ensuring that the dollar remains a strong, stable currency.” After such a long silence, this week’s tag team approach is nothing but a positive development.

2. The “Smart Money” is Cashing In. The smart money – Wall Street institutions – tends to be a great leading indicator. If you can figure out what they’re doing in time. Right now they’re sending a clear signal – take profits on your bearish dollar bets. Case in point, as the dollar met heavy selling on May 21, the smart money took almost $100 million in profits out of Currency Shares Euro Trust (NYSE: FXE). Enough to top the Wall Street Journal’s “Selling on Strength” screen. And this isn’t the first time the ETF recently made the list. All told, the increased selling activity indicates the smart money fears we may never see such high prices again.

3. George Soros Changed His Mind. Even the smartest investors are entitled to a mulligan. After bouncing roughly 3% off the March lows, in recent weeks, George Soros told the Wall Street Journal he is now “neutral” on the dollar. And expects it to strengthen over the next 12 to 18 months. Accordingly, he “greatly reduced his bets against the greenback.” Bottom line – we should pay attention when this hedge-fund phenom changes his mind. Here’s why, copied and pasted from my first article in defense of the dollar…

“A trader named Jean-Manuel Rozan once spent an entire afternoon arguing about the stock market with George Soros. Soros was vehemently bearish, and he had an elaborate theory to explain why, which turned out to be entirely wrong. The stock market boomed.”

“Two years later, Rozan ran into Soros at a tennis tournament. ‘Do you remember our conversation?’ Rozan asked. ‘I recall it very well,’ Soros replied. ‘I changed my mind, and made an absolute fortune.’”

My guess is he will make a fortune on this change of heart, too.

4. The Fed is Done. Okay. Maybe one more cut looms on the horizon. But after that, it’s time to get back to fighting inflation and hiking rates. Futures traders awoke to this same reality once revised GDP numbers were released May 29. They ratcheted up their bets that the Fed would raise rates in late October, putting the odds at 88%. Before the release, odds of an October hike stood at 70%. As I said last time, the Fed will hike again. Soon. And such moves will immediately strengthen the dollar.
5. Busted Rhymes and Tattered Clothing. The crickets are chirping among the rappers and super models. It’s been a long time since we’ve heard (even rumors) about the world’s fashionistas and rhyme-slingers extolling the virtues of the euro over the dollar. In other words, when pop-culture embraced the dollar hating, it signaled the inflection point. And it’s time for them to get caught on the wrong side of the trade for such foolish speculation.

6. The Retail Investor is (Blindly) Headed for the Slaughter. Sad as it may be, the retail investor tends to always show up late to the profit party. Right now they’re headed to the slaughter. The proof – the number and popularity of currency ETFs literally exploded in recent years. As one long-time advisor told an IndexUniverse.com reporter, “I’ve never seen this much interest in currency ETFs before…There’s just a pile of money coming into these funds now.” And that pile, according to my research, sits around $4 billion, despite most of the ETFs being less than two years old. This reminds me of my days back at Morgan Stanley. Whenever management decided to launch our own Small Cap Growth Fund for example, because the asset class was so “hot,” the asset class was too hot. It was time to recommend our clients take profits. And now that betting against the dollar is fashionable on Main Street, it’s time we head the other direction or risk getting burned like the rest of the performance chasers.

7. New President = Clean Slate. Whether Barrack “Haven’t-Been-to-Iraq-In-A-While” Obama or John “I-Have-Anger-Issues” McCain gets the nod, a new president will get a clean slate to establish their very own dollar policy. At least temporarily. And thanks to record crude prices, expect the new Commander-in-chief to move from the current administration’s weak lip service to more meaningful actions in support of the dollar.

8. We’re Still Not Decoupled. At least not from Europe. Doubts about euro-zone growth continue to pop up. The latest – a weaker than expected composite purchasing managers index reading, compiled by the Royal Bank of Scotland and NTC Economics. The measure from across the 15-nation euro-zone slumped to 51.1 in May, the worst in nearly five years. Bottom line – the European Central Bank is in a pinch. It can’t hike rates in the face of a slowdown. And it can’t cut rates with inflation running around 3.5%. In the end, the stalemate buys the dollar time to narrow the interest rate gap.

9. Institutions are Secretly Hedging their Bets. It’s not news that international stock funds significantly outperformed U.S.-focused funds over the last seven years. Or that the dollar decline aided their outperformance. However, few realize these very same funds are now protecting their portfolios against a dollar rally. Three of the top money managers in the business (Harris Associates, Dodge & Cox and Henderson Global Investors) are now hedging up to 55% of their currency exposure. A big jump, considering the international funds from Henderson and Dodge & Cox never hedged their exposure since opening in 2001.
And last but not Least…

10. The Dollar Decline is Getting Too Long in the Tooth. As I said before, “the cyclicality of the markets instructs us that the pendulum will eventually swing back the other way.” Combine that with Einstein’s theory of relativity and one thing is clear: Although the “real” value of our flat currency may never recover, its relative value certainly will. And with the worst of the financial crisis probably behind us, I stand by my conviction. The worst of the dollar weakness is behind us, too.

Consider this my second warning that the dollar will rise. And soon. That makes now perhaps the last opportunity to position your portfolios for maximum gain.

Good investing,

Lou Basenese

If you do feel like going long, Rydex Strengthening Dollar 2x Strategy (RYSBX) is a good way to enter this trade.

If the dollar does strengthen, there’s a good chance my commodity investments (includes gold and oil stocks) and foreign currency ETFs will decline. I might use RYSBX to hedge against the rising dollar.

Related Posts

• June 14, 2008 -- What Is Jim Rogers Buying Now?
• March 14, 2008 -- Gold Cracks $1000/Oz: Investing For A Recession
• January 25, 2010 -- Venezuela Devalues Its Currency
• September 22, 2009 -- The Sun Sets On Dollar Supremacy
• January 31, 2009 -- Another Case For Gold
• January 9, 2009 -- What Happens When Demand for US Debt Dries Up?
• December 18, 2008 -- The Deflation Scam

I later heard that oil prices hit $135/barrel. That news was broadcast incessantly on all the news channels and I kind of felt that it was being overdone. Whenever everyones saying that the price of something is breaking all records, it usually pulls back. I think thats why the US Dollar had shown some strength this year. I woke up on Thursday and bought the ULTRASHORT OIL & GAS ETF (AMEX: DUG), it went up a dollar and I exited my position, happy to have made enough money to pay for my gasoline bill for this month.

After that I went to UCLA for a class visit. I attended a class on Risk Management. One of the case studies they discussed was a deal between Amoco (American Oil Company, which is now part of British Petroleum) and Apache (APA) involving the sale of an oil producing property. Amoco sold the property with a guarantee to pay Apache a certain amount of dollars if the price of oil dropped below a certain amount. On the other hand, they would participate in some of the profits if the price of oil exceeded a certain amount. This was managed through the use of Put and Call Options.

It was interesting to see how large companies managed to hedge the price of oil through options, and especially ironic since oil was all over the news that day. Its not too different from how you can hedge your own expenditures on gasoline and heating oil. If you’re bullish on the price of oil and are willing to bet on this movement, you can buy the United States Oil ETF (USO). You can also buy options on this too.

Similarly, if you’re bearish you can buy the ULTRASHORT OIL & GAS ETF (DUG). You can also invest in Oil Futures contracts, however, if you’re that brilliant I doubt you’d be reading this blog!

But making directional bets in any asset class requires a certain amount of knowledge, homework and commitment. Its much easier to invest in high-yield Canadian Income Trusts like ERF, PGH, AAV, HTE, PEY-UN.TO, etc. They pay out a pretty good dividend (over 8% for most of them) and that should theoretically go up as the price of oil & gas goes up. (I say theoretically since there is some uncertainty regarding the Canadian Governments’ taxation of these trusts, so there is a black cloud hanging over them).

So far I’ve been pretty happy with my investments. I had been buying more on dips. For those of you lucky enough to have bought AAV under $9 back in January, in addition to the monthly dividends, you’ve already seen a 40%+ appreciation in the stock price! (unfortunately I wasn’t one of the lucky ones!)

But there are many ways to profit from the economic news if you keep your eyes open. By the way, USC called me on Friday. I got admitted to their MBA program with a Fellowship (tuition remmission)! So now it’s time to decide between UCLA, USC and UCSD!

Related Posts

• April 16, 2008 -- Oil Break $115 Per Barrel
• June 5, 2008 -- Time To Go Long The Dollar?
• April 21, 2008 -- 1st Carnvial of Dividends & Passive Income
• March 14, 2008 -- Gold Cracks $1000/Oz: Investing For A Recession
• October 24, 2007 -- Price Of Natural Gas Set To Spike
• September 22, 2007 -- Investing In Oil
• May 26, 2010 -- Sweeten Your Returns With Chocolate Dividends

According to Kevin Kerr, editor of a commodities investment newsletter,

“The U.S. is filled with gas hogs, but the developing world is catching up. Last year, Chinese drivers bought 5.5 million cars, minivans and SUVs and 3 million commercial vehicles, up from just 1.6 million vehicles sold in 1997. Sales are expected to grow 15-20% this year. Looking down the road, China’s auto sales are expected to grow by 1 million vehicles annually through 2015.

“Meanwhile, India is poised to rocket past China as the world’s fastest-growing car market. Sales of passenger cars in India increased 12.17%, to 1.5 million, in this past year.

“As a result, China’s oil imports are expected to nearly double by 2020, and India’s oil imports are projected to more than triple over the same time period. So while $120 oil and $4 gas may seem expensive, it’s likely that in three years, we will have $250 crude and around $8 gas. I wonder if the ‘experts’ will still be debating whether oil prices are high by then.”

Seems like someone else agrees with my prediction of $8 per gallon gasoline!

Solar energy stocks have also been on a tear lately. I had shorted First Solar (FSLR) earlier this year and I closed out my position with a small profit. However, since then its spiked from $195 to nearly $295! I would’ve made a lot more money if I had just gone long! It’s currently sporting a very high PE ratio of 143. Despite its ~50% jump, I don’t feel comfortable buying stocks which have absurd valuations. As Buffett’s mentor Benjamin Graham believed, you should always look for a margin of safety. There’s no safety in over-paying for a stock.

But regardless of the increase in green energy stock prices, I think alternative energy sources will take a lot of research and time before they can replace oil as a major source of the world’s energy. Until then, I’m happy to keep holding on to my dividend-producing canroys.

For any of you that think ethanol is a viable long-term alternative, I strongly recommend reading Time Magazine’s article: The Clean Energy Scam.

This is a picture of Brazil’s Amazon rainforest which has now been replaced by sugarcane fields to produce ethanol. Yes, its a cheap alternative to Oil, but it is in no way a better or a green solution. In the US, using a food source to produce energy is even more moronic. But until we start having our own food riots, I doubt the government subsidies will go away.

Related Posts

• June 14, 2008 -- What Is Jim Rogers Buying Now?
• April 16, 2008 -- Oil Break $115 Per Barrel
• October 24, 2007 -- Price Of Natural Gas Set To Spike
• October 8, 2007 -- Gouging At The Pump?
• September 22, 2007 -- Investing In Oil
• July 15, 2006 -- Oil Hits $78 Per Barrel!
• June 7, 2008 -- Time To Go Long The Dollar – 2

China and India together have  a third of the world’s 6.66 billion people. If 10% of these 2.2 Billion people start buying cars, that’s 220 million new cars on the planet ready to start guzzling more gasoline. I think thats the current number of cars in the US, so effectively the demand on oil is set to double over the next few years. And along with Tata Motors new $2,500 car, you can be sure that eventually atleast 20% or more of India’s and China’s population will be driving cars instead of cycles or mopeds that give 247 miles/gallon. That 247 number is  not an exaggeration. Owners of Suburbans should refrain from crying right now.

Based on the growing prosperity in just these two countries, the demand for the world’s resources is growing at a furious pace. Unfortunately, oil is a key component of prosperity and the global supply of it is somewhat stagnant. Despite a few  new oil fields being found here and there, new reserves are not keeping up with the depletion. According to one report, all the oil in Alaska would last the US for only 6 months.

If you think that gas prices are high at over $3.50 per gallon (I just paid $3.95 for mid-grade for my wife’s Acura TSX), wait until summer. There are reports that the refineries are absorbing the cost of high oil prices right now (and some of them have hedging contracts in place to mitigate this high price), but within a few months they’ll be passing this burden on to the consumers. Oil prices at the pump could very well hit $5 and if this trend continues, it could hit $8/gallon. 

In the UK, petrol (that’s what the rest of the world calls gas) costs about 1 pound per litre, which equates to $7.50-8.00 per gallon. Now you Suburban owners can cry now if you like. Or you can start investing in oil related investments like Canroys and oil drilling programs.

Related Posts

• May 24, 2008 -- Profiting From The Rise In The Price Of Oil
• October 24, 2007 -- Price Of Natural Gas Set To Spike
• September 22, 2007 -- Investing In Oil
• June 5, 2008 -- Time To Go Long The Dollar?
• April 30, 2008 -- Should You Invest In Green Energy?
• April 21, 2008 -- 1st Carnvial of Dividends & Passive Income
• March 14, 2008 -- Gold Cracks $1000/Oz: Investing For A Recession