Bellwhethers, Heroes, And Villains

The Daily Reckoning

Weekend Edition

July 21-22, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Bellwhethers, Heroes and Villains

Last week’s hero; this week’s villain. After rallying to Microsoft’s side, following a favorable ruling in the Justice Dept. anti-trust case a week before, investors punished Microsoft for weak earnings… and meted out a little ire to the rest of the market for good measure.

The Dow slipped 33 Friday to 10,576. The Nasdaq shed 17 to 2029 and the S&P 500 lost 4 to end the week at 1210. Overall, the market’s three major indicators dropped this week – the Nasdaq a little over two and a half percent, but the S&P 500 and the Dow basically stayed the same.

Weakness in industry “bellwethers” – like Microsoft – still indicate a lack of clarity with that “vision” thing. USAToday reports that more than 800 companies have warned of shrinking profits and “many others have said that business is so uncertain that they can’t make accurate projections.” Meanwhile, analysts continue to search for evidence they can sell to their clients as “the bottom”.

The euro – up to $.87 this week – looks like it may finally be making its move on the dollar, but “A weak global economy, a bumbling European Central Bank and fears of a disruptive euro currency conversion in early 2002,” says resource man John Myers “have conventional wisdom singing the praises of the dollar.”

“Neither the euro,” predicts Myers, “nor the dollar are likely to prove the winners in the next 6-12 months.” (See: The Euro Conversion in 2001 AND 15% in 15 Weeks! in Flotsam & Jetsam below…)

ADD’L PRICES FOR THE WEEK: Euro gains ground… dollar weakens… (more below)

Gold: $270

Crude Oil: 25.94

Natural Gas: 2.95

CRB Index: 202

Dollar Index: 117

The Euro: .87

British Pound: 1.42

Japanese Yen: .81

FLOTSAM AND JETSAM: Get Rich Outside the Dollar… AND the Euro!The Euro Conversion in 2001 AND 15% in 15 Weeks

– from John Myers,

Resource Trader Alert

“Conventional wisdom has the dollar following the Nasdaq. After all, it seems a pretty good bet that once U.S. stocks started falling all the foreign money that had chased them on the way up would pour out. But that’s not what has happened.

Foreign capital has stayed put. In fact, when the Nasdaq challenged the 2000 level to the downside – the dollar actually rose!

The shoe is now on the other foot. A weak global economy, a bumbling European Central Bank and fears of a disruptive euro currency conversion in early 2002 have conventional wisdom singing the praises of the dollar.

Europe is no longer seen as a haven; rather it is the United States that is supposed to lead the world from the brink of collapse. Alan Greenspan is being praised for opening the liquidity spigots wide-open while Wim Duisenberg is vilified for maintaining a steady policy.

The trouble with conventional wisdom is that it’s… well, so conventional. Markets, on the other hand are unconventional, often doing exactly the opposite of what can reasonably be expected by conventional wisdom.

We believe such a period is at hand for the dollar. To profit from a dollar decline we recommend playing a currency unrelated to the euro or the dollar.

It’s the logical flight-to-quality currency, given expectations of problems with the upcoming euro conversion. It’s still too early to tell, but the continuing sell-off of Latin American currencies could spell the end of the dollar’s flight-to-quality status. After all, these nations are right on America’s doorstep. One of the logical replacement choices is the Swiss franc.

The market is also setting up well from a technical perspective. The current pattern is awfully similar to 1998, a period which saw the Swiss franc rally against the dollar from a low of .69 to a high of .79 – a move of nearly 15% in just 15 weeks.

Markets rarely mimic the past exactly; however, we believe all the elements are in place for a Swiss franc rally.”

Vive la Liberte,

Addison Wiggin,

The Daily Reckoning