Fortune Favors the Brave

The Daily Reckoning Weekend Edition
November 27-28, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

Your Baltimore-based editor received a phone call from London this morning.

"Bit of excitement in the markets last week, eh, Tom?"

It was an analyst from a major pension fund in the City. He was calling to chat about the currency markets.

"Have you seen what cable’s doing? UBS just lowered their forecast for the dollar…I just wanted to see how your long-dollar position was holding up. You must be slightly nervous?"

Cable is trader-slang for the dollar/sterling exchange rate. On Friday, sterling spiked to $1.9037, the highest it’s been in 9 months and three ticks short of a new 13-year record against the dollar. Here’s why:

Last week, UBS, Merrill Lynch and JPMorgan all cut their predictions for the dollar.

UBS marked the yen up to 103 by March, and the euro to $1.36.

JPMorgan put the yen at 96 and the euro at $1.37 in the same time frame.

Merrill Lynch matches the yen prediction, but puts the euro at $1.39.

Together, the three firms account for 22 percent of the $1.9 trillion-a-day currency market.

Then there are the Russians. Here at the DR HQ, we’ve been following the Russian dollar-dumpers very closely…

Readers will recall Oleg Mozhaiskov, former deputy chairman of the Russian Central Bank, pushing for gold as a an alternative to Russia’s dollar reserve.

Readers will also recall Senior Deputy Finance Minister Alexey Ulyukayev. On Monday, he discussed "the possibility to change the reserve structure."

Then on Friday, Deputy Chairman Konstantin Korishchenko said the Russian Central Bank was moving away from the ‘dirty’ float of the ruble against the dollar.

The Russians are not alone. On Thursday, Bank of England Chief Economist, Charles Bean, threw his hat into the ring. "At some stage action will have to be taken to close the U.S. fiscal deficit and, when that happens, the real value of the dollar will have to fall if a sharp slowdown is to be avoided," Bean told an audience of business leaders.

And the Indonesians…on Friday the FT reported that they too might cut their dollar holdings if it keeps sliding. Indonesia holds $35 billion in dollar-denominated reserves.

Finally, a respected professor of economics and a member of the central bank’s monetary policy committee in China, was quoted on Friday as saying Beijing had cut the proportion of foreign exchange reserves held in dollars. The markets panicked and dumped both the dollar and bonds so suddenly that our flustered bureaucrat was forced to deny the statement. "I think the Chinese monetary authorities are very clever and they must already have taken action," Prof. Yu said. "But I have no information whatsoever about what they are doing."

As anxious as a group of sprinters crouching in their blocks, these men, and the organizations they represent, are all getting ready to race for the door at the same time.

In anticipation, bond yields moved higher for the fifth consecutive week. The 10-year Treasury climbed 4 basis points to yield 4.24%, the highest since August.

Oil, the other thorn in the stock market’s side, also moved higher, moving briefly above $50 a barrel. The goo closed at $49.44 up $1 on the week.

But despite the rising energy and interest rates, stocks eeked out an up-week. The Dow gained 65 points to close Friday’s session at 10,520. The Nasdaq and the S&P both managed small gains as well.

Gold’s holding its own. It breeched $450 for the first time in 16 years and now sells for $452 an ounce.

"They’re saying cable could hit $2.30…and the euro could go all the way to $1.50," goaded the analyst on the phone.

These projections, as insane as they seem, will probably be reached; but for now we stand stubbornly in the doorway, waiting to be trampled by a panicking herd of central bankers. "It’s a pretty aggressive play, and yes, nerve-wracking too," we replied, trying to justify our short position in Japanese yen. "But as long as we can hear gnashing teeth and people are seriously considering the possibility of a ‘crash,’ we’ll keep buying dollars."

"Fortune favors the brave, Tom…shame you’re such a wimp! Talk to you later…"

Click.

Regards,

Tom Dyson
The Daily Reckoning
November 27, 2004

P.S. The analyst is an old friend, so he was just messing. But the dollar’s bear market is real. We’ve been saying it for years.

There’s a number of ways to profit from the move…short dollars, short bonds, buy foreign currencies, or gold even.

But perhaps the surest way to make a killing from the dollar’s swoon might surprise you. It’s commodities, and some of the smartest investors in the world are snapping them up while they’re still cheap. Take Jim Rogers for example. He was so convinced by the case for commodities, he set up his own index!

For specific recommendations – like the grim coffee position that returned over 150% in a matter of days following an earthquake in Columbia, or the devastating OJ calls that jumped 36% when a second hurricane pummeled Florida’s orange groves, check out veteran trader, Kevin Kerr.

— Daily Reckoning Book Of The Week —

The Intelligent Investor by Benjamin Graham

"By far the best book on investing ever written."
–Warren Buffet

The value investor’s bible. This classic tome will show you how to determine whether or not a company is suitably undervalued and ready for investment or simply a dog to be avoided at all costs.

A high proportion of the world’s most successful money managers and investors would claim to have been heavily influenced by this book…conclusive evidence which shows just how fundamentally important Graham’s ideas are to a successful stock picking strategy.

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THIS WEEK in THE DAILY RECKONING

INTERVIEW WITH A DAY TRADER 11/26/04
By Bill Bonner

"…I had one woman on Tuesday. Nice green eyes. Reddish hair. And a thick Irish accent. She said she had lived in Ireland all her life. Even had an Irish passport. But I could tell- Russian Intelligence…"

THANKSGIVING  11/25/04
By Bill Bonner

"Beirne hails from Mississippi. And while Mississippians will sit down with the rest of the nation…and tuck into their turkeys with equal relish…perhaps only substituting Bourbon Pecan pie for the sweet potato or pumpkin pie enjoyed in Maryland…it was not always so. Somewhere deep in the most primitive part of his medulla oblongata, the part of the brain where race memories are stored, Beirne resists Thanksgiving. It is, after all, a Yankee holiday."

EXPORT DEPENDENCE 11/24/04
By Gary Shilling

"Asian countries are also concerned about the strength of their own currencies against the dollar and the resulting negative effects on their exports-specifically, their exports to the United States since the lion’s share of their exports, directly or indirectly, end up in America."

GOLD AND GRAVITY 11/23/04
By Dan Denning

"I made the enhanced liquidity argument myself – about a year and a half ago, when gold was much less popular. Today is different. Gold is ‘hot’. But is it ‘hot’ in the way that, say, Britney Spears in a skin-tight red rubber suit is ‘hot?’ Or is gold warming up because it’s at the centre of a major shift in investor sentiment about asset allocation and the need for diversification?"

A FINANCIAL FIASCO 11/22/04
By The Mogambo Guru

"And then we cruise on over to the actual banking side of the system and note that they ALSO bought up a lot of government debt last week, if you are the kind of person who thinks that $5.1 billion is a lot. I am, personally, one of those old-fashioned guys who still thinks that 5.1 billion of anything is a lot, and especially if that 5.1billion of anything is accumulated in one crummy week."

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HEADLINE, NEWS And INSIGHT:

Treading Carefully in China
by Christopher Mayer

"This brings me to an interesting point. Emerging market investing is cyclical and fraught with peril. While China presents enormous opportunities, it also brings specials risks as well. Emerging markets can experience gut-wrenching peaks and valleys."

The Bush Recession?
by John Mauldin

"Social Security must be reformed. Now. Let’s be realistic. If we do have a serious recession, it is quite possible we will see a Democrat in the White House in 2008. That means 2012 at the earliest for any real reform, and it will cost hundreds of billions (if not a few trillion) more. This is one we must do for the kids."