All About The Dollar (And Silver, and…)

Daily State of the Markets 
Tuesday Morning – April 26, 2011

Good morning. At first glance, the markets appeared to do a whole lot of nothin’ on Monday. We heard lots of reports that traders may have been content to bide their time until Mr. Bernanke holds his first-ever post FOMC meeting press conference on Wednesday. But in reality, traders didn’t exactly do nothing yesterday as the blue chips fell back a bit while the NASDAQ rose, the dollar fell (again), and silver went through the roof (yes, again).

While it wasn’t terribly surprising to see stocks do little in front of another big batch of earnings, some important economic data, and an historic FOMC meeting this week, the movements in the dollar and silver have gotten a little nutty. In fact, if you’ve ever wondered what traders mean when they refer to a chart as “going parabolic,” take a look at iShares Silver Trust (SLV). And if the meaning of the phrase isn’t obvious when glancing at a daily chart, be sure to switch to a weekly chart to get the real picture of what silver has done over the past eight weeks. Wow!

At issue here is the relationship of global inflation expectations, the dollar, and the outlook for interest rates (relative to other countries, that is). You see, there seems to be a universal expectation in the market that the dollar is going to continue to fall. Forget about the prospects for the U.S. economy or what the Fed might (or might not) do down the road. In today’s world, the game is about playing one currency off of another. (See symbol FXE – the CurrencyShares Euro ETF – as Exhibit A on this notion.)

With the Fed unlikely to raise rates for at least the remainder of 2011, the dollar is, and is expected to continue to be, a very low yielding currency. Now toss in the fact that the Eurozone, China, India, and Brazil (to name a few) are all currently raising rates in an effort to fight inflation, and the consensus among traders is that the dollar is a sell – day in and day out.

With the dollar falling and expectations for inflation rising, it is little wonder that silver is suddenly being viewed as a hedge against inflation, a store of value, and an alternative currency. To hear some traders tell it, the Chinese (among others) are now viewing commodities such as silver as a better bet than currencies. And with reports out recently that the Chinese are buying commodities as a way to diversify their currency holdings, the move in silver starts to make some sense.

The stock market bulls then chime in with the idea that while equities are not a store of value, they will benefit from the current environment. Those adorned in rose-colored glasses tell us that there are many, many companies that benefit greatly from the low interest rate, falling dollar environment that seems to be upon us.

From a big-picture perspective though, the fly in the ointment is the idea that the falling dollar environment will continue indefinitely. It has been my experience that right about the time everybody, everywhere starts playing the game the same way, the rules of the game tend to change. So, while silver can certainly go higher on the back of the momentum trade, the concept of profit-taking might come into play at some point in the near future. And when it does, it will be very interesting to see what happens to equity prices.

Turning to this morning… While the futures are being pushed and pulled a little after each earnings announcement (Ford, UPS and 3M have posted better-than-expected results while Netflix and Coca-Cola disappointed), the overall tone of the market remains positive thus far. On a chart basis, it appears that the bulls will once again attempt to push the S&P through the all important 1344 level this morning. Remember that a close above the February high is likey to bring in short-covering and technical buying.

On the Economic front… We don’t have any economic data to review at the moment but we will get the February Case-Shiller Home Price Index at 9:00 am eastern and then April Consumer Confidence at 10:00 am.

Thought for the day: Laughter is actually great exercise – it’s like jogging for the soul…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: Closed
  • Shanghai: -0.87%
  • Hong Kong: -0.54%
  • Japan: -1.17%
  • France: +0.35%
  • Germany: +0.41%
  • London: +0.31%
• Crude Oil Futures: +0.07 (May contract) to $112.35
• Gold: -$4.60 to $1504.50
• Dollar: higher against the Yen and Pound, lower vs. Euro
• 10-Year Bond Yield: Currently trading at 3.365%
• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +5.10
  • Dow Jones Industrial Average: +40
  • NASDAQ Composite: +5.20

Wall Street Research Summary

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