Just a few practical words to begin this week’s letter.
There are a lot of people who swear by P/E Ratios as the ultimate guide to buying and selling equities. Others will tell you it’s all in the rise and fall of the 200 day moving average. Still others say the game is based entirely on sentiment figures.
Likewise, there’s a loud and growing chorus of pundits who scream daily from the rooftops that the dollar devaluation – along with that of the Yen, the Yuan, the Euro, et al. – is about to bring about a catastrophic, global financial rupture. They’ll tell you that it’s imminent and that without a boatload of gold in your portfolio you’ll end up destitute, downtrodden, disemboweled and dusty.
Yes, my dear – dusty.
And of course that’s been a losing bet for nearly half a decade.
What’s important to know about all of the above methods of determining the financial future is not whether they’re wrong or right. Indeed, they all may be wrong or right at different times, and every dog has his day. What’s more important is that it never pays to get married to any indicator or set of indicators because at some point they all lose their efficacy – generally at precisely the point that everyone considers them THE most important prognosticating tool available.
We don’t buy into that.
At Normandy, we use a wide variety of indicators, fundamental and technical, and employ various other arcane tools to understand market direction over the intermediate and long term. And as most of you know, the themes we’ve focused on to explain the bull market are
1) massive liquidity created by currency devaluations, and
2) a generational rotation out of bonds into equities.
There are a number of other sub-themes we’ve harped on over the years, but those are the principal drivers of the market as far as we’re concerned, and they’re still in force today.
As we’ve stated above, however, we’re not married to these notions, and we consider it outright dangerous to engage them in such a monolithic manner. We always aim to challenge ourselves with respect to their validity.
How will you know?
A friend asked us last night what will be the break point? That is, how will we know that the jig is up, and that our hypothesis that the vast ocean of liquidity and rotation out of bonds that’s increasingly finding its way into the equity pool, raising stocks to unheard of heights, is no longer in force?
And the answer, in short, is as follows –
The change will come when the illusion that paper is anything more than paper disappears.
The average worker in South America or Southeast Asia or Africa, or anywhere else for that matter, would still be damned pleased to collect his monthly paycheck in U.S. Dollars. And as much as the Russians and Chinese may conspire to undermine the dollar as the world’s reserve currency, trying to convince those same laborers to take their wages in Rubles or Yuan instead, would be a helluva sales job.
The dollar is king. And no matter how much the pundits lambaste it and the gold bugs deride it, it’s still sitting on the currency throne.
Just an Illusion
Why is that the case?
Because there’s an illusion that the paper that today circulates in the form of dollars has value. And that illusion is precisely what gives our money its strength and legitimacy.
The day that faith in that illusion begins to teeter, is the day the top is in and the cookie starts a’crumbling.
Until then, it doesn’t matter to which level the dollar ascends or descends, or what the indicators say, or how high the S&P 500’s earnings multiple climbs, or what technical analysis suggests, or anything else. All that matters is whether people have faith in the buck. Bottom line.
Because it’s the vast quantity of currency that’s driving the market higher. And it will be that same vast quantity of currency that will ultimately
bury the indexes in their grave.
When? When, in a fit of panic, everyone realizes that it’s no more than paper.
And we’re most assuredly not there yet.
What’s your proof!?
Ask anyone – anyone at all, anywhere, to take $100 of the green, rip it up and flush it down the turlet.
It just won’t happen.
As of today, the reality of the investment world is that people believe in, trade with, make purchases and get paid in U.S. Dollars. And there’s no other way they’d rather have it.
That may irk Wall Street strategists, gold bugs, hedgies and even some pundits and economists, but that’s our reality, friends. And no matter how much we may loathe it, as investors we don’t dare fight it.
The Bull Market Lives! Play the Bull Market!
Today’s trade is a bet on none other than the aforementioned phony king of currencies, the almighty weak one: the greenback.
Take a look below at a chart of the U.S. Dollar Index for the last year. And pay special attention to the run-up in value that led to the latest sideways, five month drift.
As the chart shows, the dollar struck highs against the world’s major currencies in the middle of March, and has traced a tight, sideways pennant pattern ever since. It currently sits just four percent off its peak, and has found good support at the 137 day moving average, currently at 96.30 and rising (at right of chart).
Pennant patterns are wondrously reliable, indicating a pause in the action before continuing with the prior trend. From last summer (2014) the trend has been strongly higher, and so we believe it will continue.
We are recommending a bullish position on the dollar, as the pennant pattern should resolve to the upside at some juncture in the next quarter.
We’re playing it with the PowerShares DB US Dollar Bullish ETF (NYSE:UUP) via a purchase of the upper band of the pennant and a sale of the lower.
And it goes like this –
Options Trader Elite recommends you consider buying the UUP December 26 CALL for $0.25 and selling the UUP December 25 PUT for $0.40. Your credit on the pair is $0.15.
With love of the hunt,
Hugh L. O’Haynew, Captain of the Derivative