Wednesday, September 10, 2008

Dollar Rally Fueled by Speculators

Just a little commentary tonight!

Is anyone as tired of speculators as I am? I can't wait until I see the day where these specs run out of cash. Its inevitable! Why? How many casinos can you walk into where you can beat "the house" by speculating? Uhh 0?

Gamblers in the markets eventually take too much risk and get caught in a bad trade. How many trading accounts have been blown out by the reversal in commodities? You can bet(no pun intended) that number is very high.

This gets me to my point tonight. Gold dropped another $30 today as the currency continues to strengthen. This is the big trade in the commodity markets: Long the dollar/short gold. This trade has been a homerun the last few weeks. As a result, its success caught the eye of the speculators who are now all piling into the same trade. If you can't beat em join em right? Its about the only thing thats working in the markets right now. This is what makes this a dangerous trade. You have seen what the speculators can do when something gets hot in the markets.

The combination of greed and risk taking by the speculators makes any sandbox they decide to play in a dangerous place to play. If they get into your box, get out before you end up with sand in your pants.

Remember what happened to home prices when the house flippers came calling? How about watching oil double in a few weeks from$70-$140 before reversing back to $100 in a matter of weeks. Stay away from these thieves. Your trades will end up in tears just like the homebuyers who bought in 2005/06.

Like any other Ponzi scheme, if your in early its profitable, but if your late or don't know when to get out you end up with empty pockets.

Its pretty obvious the specs are sitting in the US dollar and shorting gold. My advice is to stay away from both because its already late in the game. When these trades reverse its frightening how violent they are!

Think about it. Why would the dollar be going up after the government just intervened with the mother of all bailouts. I can't think of anything that could be more inflationary. We also have historically low interest rates to boot. It makes no sense when you look at the fundementals, but who said the fundamentals mean anything in this filthy snake pit we call the stock market.

Now these long dollar boys will tell you they are buying the dollar because we were the first ones into the recession which means we will be the first ones out on the other end.

Ummmm..Yeah...OK...NOT! IMO this is a pretty weak arguement for going long the dollar. This trade may continue to work for a little while longer but watchout! When this trade stops working, and the specs find another sand box to play in, I expect to see a nasty cratering in the dollar and a surge in gold.

Please note that the long dollar trade could still have legs. We all know how good the specs are at keeping the game going. I wouldn't go near it here because they are still playing in the sand. However, if I see a trend going the other way, I'm a buyer of Euro's and/or gold.


Jeff said...

The heats turned up on Lehman by moody's...Merge or we downgrade you! New Zealand just cut interest rates too.:

"Lehman sale more likely; Moody's says it will cut without a deal
Font size: A | A | A
6:04 PM ET 9/10/08 | Marketwatch

SAN FRANCISCO (MarketWatch) -- An acquisition of Lehman Brothers may be more likely in the wake of the brokerage firm's latest quarterly loss and steps it's taking to sell assets, according to some analysts.

Moody's Investors Service said late Wednesday that it will probably downgrade Lehman if the firm doesn't do a deal with a stronger rival.

Lehman (LEH) reported a fiscal third-quarter net loss of almost $4 billion on Wednesday after more than $5 billion of new write-downs, mostly on soured mortgage exposures. Read full story.

Anonymous said...

Hi Jeff,

this is one of the very few times I totally disagree with you. The Dollar is gaining against the €uro because so far the Europeans said there will be slower growth but no recession. Now they are rerating and coming to the conclusion that the European economy goes straight into a recession. Europe is facing a hard landing. Obviously the $ gains against the €.

Jeff said...


This is a tough one. You make a great point but the move has been so violent.

I didn't say this move was over. I just think it seems a little overdone.

All hell is breaking loose in the financials today so its hard to read whats going on.

I think the move higher on the dollar was warranted. I just think it got ahead of itself because of speculation.

Is I said before, when the trend breaks is when I will get interested. As for now the dollar is still taking a moonshot.

We will see what happens. I appreciate the counterpoints. It helps me re-evaluate my thesis.

For now I am on the sidelines here.

johndaniels said...

I agree with your take here. Anyone with 1/2 an IQ is in this camp as well. I am forming the opinion that #1. If the dollar becomes too weak; the FED may lose their power and privaledge of controlling the currency...they wont allow that. #2. china is motivated, among other countries, to keep their currency weak, thereby buying dollars. #3 traders, of course, running ot the dollar because there is really no where else to go. nowhere.

This leads me to conclude even though it is 100% counter intuitive, this trade may inf act have legs; it may go on awhile, but of course it will end. All this will provide is an excellent chance to get into metals at possibly 2002 or lower prices.

johndaniels said...

I must add we will certainly witness a collapse of both merrill lynch and lehman within the year; possibly some real threats to B of A as well (I really hate that coutrywide acquisition). The investment houses have no future; they cannot sustain income outside of derivatives and/or creative investments. As people flee from the MER and LEH's, they will put their money in the AMTD's and Wells. Noone will pay 200 commissions if they can pay 9 bucks, with the same access to research; and wall street has lost so much credibility (as have all these other pundits who have been 100% wrong), its hard to see a future for these firms.

The safest places for cash would be outfits like TD Ameritrade and Wells Fargo...FOR NOW.

Minton Mckarkquey said...

I am inclined to agree with johndaniels. It's difficult to see what strategy the IBs can follow with in the coming years. Time to short the banks and give them a taste of their own medicine!

Jeff said...

Great thoughts everyone.

John Daniels

Some great points. I agree. It seems every trade is overdone in this market and then unwinds rather violently.

They eventually exhaust themselves and then violently reverse. We just need a trend change.

Its hard to predict when that happens. Patience is a virtue!