Category Archives: Money Flow

What Does A Strong US Dollar Mean For Markets?

Traditionally a strong dollar has been bullish for the stock market. Since the late 1970s, the stock market has actually performed twice as well during dollar bull markets than during dollar bear markets. I should however point out there are some additional questions being raised this time around in regard to the US dollar possibly losing its reserve currency status? I’m not particularly in this camp (at least not any time soon), but we need to recognize the powers that be in other areas of the world are desperately trying to debunk the US dollar as the world’s global currency. Remember, back at the end of August, Gazprom (who is the Russian equivalent of ExxonMobil), announced it would be accepting payment for its oil in Rubles & Yuan…NOT US dollars! Obviously the US dollar will not fall from the leader board overnight, but there are certainly those in the trade who are becoming much more concerned about a longer-term transition from power. For now the US dollar remains in the midst of a major bull run and I suspect it will continue. Below are some reasons why and what the rally may mean for your investments:

  • Several Reasons Why US Dollar Is Strengthening… Improving US economy; Fed moving toward monetary normalization (no more QE) while other global central banks—notably the European Central Bank (ECB), the Bank of Japan (BoJ) and now China are aggressively easing policy; Thoughts of increasing US interest rates attracting more investment dollars; US energy renaissance means improving US trade and account deficits.
  • Benefits of a Stronger US Dollar: Lower import prices (cheaper oil, autos, etc…) equating to more discretionary spending power; Foreign travel and land purchases become cheaper for Americans.
  • Negatives of a Stronger US Dollar: This is a tough environment for US farmers because it lowers commodity prices (particularly those priced in dollars). As the dollar appreciates, commodities become more expensive for overseas buyers since they have to convert their weaker currencies into dollars, which basically works to curb or slows global demand. As you can see this makes US exports more expensive and less competitive in foreign markets. Short-term, there is some concern that third and fourth quarter corporate earnings could be hurt a bit by the dollar’s recent surge.

Why You Do NOT Want To Short The Bond Market

Every trader I know has tried their hand at shorting the bond market on thoughts that yields are eventually moving higher…only to donate to the bulls.  There is some thought out there amongst the bigger money players that as the US stock market continues to surge higher and the largest Pension Funds try and keep their 60/40 “stock-to-bond” ratio, they are constantly being forced to liquidate stocks and buy more bonds.  In other words as the price of stocks keep moving higher it pushes them more towards a 70/30 “stock-to-bond” ratio. In order to get it back in sink and closer to their traditional 60/40 ratio they simply scale back the stock side a bit and add a few more bonds. Hence, it’s going to be tough to win the short battle in bonds as long as the stock market is making fresh NEW highs. 

David Tepper Says It’s “Nervous Time”

David Tepper, founder of Appaloosa Management, who made the most money of any hedge fund manager in 2013 at $3.5 billion, believes believes investors, including himself, should be approaching the market with more caution now. His words are as follows:

“I’m not saying go short, I’m just saying don’t be too fricking long right now.”

“I have a position (where) I’m long enough with exposure where I can bring it up or I can take it down.”

“I am nervous. I think it’s nervous time.”

“I think we’re OK,” he said of the current investing climate, “but listen, there’s times to make money and there’s times not to lose money. This is probably (a time when) you’re supposed to think about preserving some of your money. If you’re 120 percent invested, it’s probably too much. You can still be long, but you probably should have some cash.”

If You Want to Make a Bullish Argument…

There is no debating the fact the commodity markets have changed the past several years, I will call it the post-2008 shift. Since that period I have found you need THREE MAIN ingredients to spark a longer-term bullish fire: 

  1. Demand – First and foremost, you have to have a strong “demand” story. I contend we now have one in the corn market. I believe Chinese demand for US corn can’t get much worse, yet exports have dramatically rebounded. Corn being used for ethanol is teetering on a NEW record demand and appears to be remarkable strong. Ethanol exports are big and there doesn’t appear to be many major hurdles in our path.  I can also argue with limited soy supplies and wheat prices in a counter seasonal trend (moving higher rather than lower) corn for feed usage is also very strong.  Bottom-line, we absolutely have the first ingredient needed for a bull story…DEMAND! If we didn’t have a big demand story, nothing else would really matter, but we have one…so now the games begin. 
  2. Increased Horsepower & Torque – In order to pull any large object up an increasingly steep slope you need more horsepower and torque.  In the case of the markets this means we need increasingly more buyers than sellers. One can easily argue during the past six-months this is exactly what has happened and has caused prices to rally.  During this period of time the funds have gone from short around -200k contracts of corn to long about +300k contracts. The question now is will they continue to add more horsepower to the equation or have they already redlined the engine?  Both bulls and bears can argue either side of the debate. Knowing how funds generally tend to stick with what’s been working and have the tendency to  inflict pain on the market much longer than anyone ever imagines, I am going to say they are currently in a “holding pattern” but would ultimately like to add more length, especially considering the negative correlations with equities and the ongoing geopolitical tail-risk associated in the Black Sea region.  This debate will obviously continue for the next several months so pay close attention, it is an extremely important ingredient!
  3. Production Hiccups – In my opinion the third and final ingredient needed to spark a massive bull run (assuming ingredient #1 “demand” and ingredient #2 “interest from the funds” has already been added to the mixing bowl) is a “Production Hiccup” or crop failure of some sort. This has obviously NOT occurred at this very moment but obviously could. Having seen how “Mother Nature” has played the past several years we simply can’t give her an “gimmies.”  Be careful however getting ahead of yourself.  If this ingredient isn’t exactly right it can ruin the entire recipe.  The funds will quickly lose interest, our horsepower will drop and the run to higher ground will abruptly end.  

Unfortunately, in today’s market place we need ALL “3 MAIN INGREDIENTS” to take corn prices move back above $6.00. Traders are placing their bets right now on IF ingredient #2 Increasing Horsepower and #3 Production Problems are going to make it into the mix… 

Understanding The “Negative Correlation” & Reposition of Power

There has been a lot of talk as of late about larger managed-money players taking a more keen “long” interest in commodities. One of the primary reasons is because we have just come off a 30% plus rally in equities and the market seems as if it has stalled out to some degree on geopolitical tail-risk and various global uncertainties. These “uncertainties” can be hedged and equity gains locked in to some degree by being long certain commodity groups. Keep in mind, about 75% of the 40 major commodity markets we track are above their 150-day Moving Average. What are the “uncertainties”???

    • The Worlds #1 Economythe US, is trying to perform a feat never before attempted. What makes the trade even more nervous is the fact a rookie master magician (Janet Yellen) is now on center stage. Keep in mind a “taper” of this magnitude has never been attempted, and no one, I repeat no one, is certain how it all plays out longer-term. Could it spark surging interest rates? Could it cause the economy to relapse? No one really knows, therefore the trade is “uncertain” of the outcome. 
    • The World’s #2 EconomyChina, continues to report lower economic growth. The trade is very “uncertain” how the transition to a more consumer driven economy will play out. 
    • The World’s #3 EconomyJapan, is filled with economic “uncertainties. The trade seems very nervous about “Abenomics,” not only it’s immediate effects but also longer-term implications it may have on the Japanese economy.
    • Repositioning of Power – Here is where it starts to get a bit tricky. There is some talk that since the US didn’t go into Syria with guns blazing that there might be a shift in power starting to unfold. Fear amongst investment minds is that by the US not taking action it opened the door for Putin to make a move into Ukraine. There is also now talk that Japan is becoming much more nervous about China’s next move. Concern is that China might be starting to feel like Putin, on the fact if the US isn’t going to do anything about Syria and nothing about Ukraine, then they might not take any military action if the Chinese decide to take over the highly disputed Senkaku Islands from Japan. This possible shift in power has some money-managers nervous therefore hedging more geopolitical type risk remains the main theme.

When The Bulls Throw A Party…

To say it’s more in vogue these days to be LONG “agriculture” would be an understatement… The investment world has become awash with brokers, salesman and money managers who have sold investors on the opportunities that abound in being long “agriculture.”  The story is simple, and gets the attention of most: A rising global population; a massive shift in earnings pushing millions from the lower to middle class, meaning a shift to a higher protein diet; geopolitical uncertainties; weather extremes; etc… At the first glimpse or sign of a bullish opportunity, often regardless of S&D’s and or other fundamental logic, investment managers seem quicker than ever to pull the trigger and load up on the bull side of the market. Bottom-line, just little hints of bullish headlines are creating waves of interest and money-flow to the long side. Whereas bearish fundamentals seem to carry much less enthusiasm and or following.  As the world continues to expand, and the media continues to ask “how we are going to feed everyone,” I suspect being LONG agriculture will remain much more sexy than being SHORT agriculture.  Understand I am by no means saying the bears won’t win a few battles or at times have their day in the sun.  I am just letting you know when the bulls throw a party a lot more people tend to show up for the event.