Friday May 13, 2005 - 11:11:59 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar breakout - Mr. Buffet phone home!
“There is one thing stronger than all the armies in the world, and this is an idea whose time has come.”
Confused? Join the crowd! Yesterday, we were greeted by news that US retail sales were twice as strong as expected for the month of April. This seems to be more evidence the so-called soft patch is just that, a soft patch—growth to resume. But, commodities were clobbered yesterday. And in describing the bloodletting there, most headlines said commodities fell on the pending slowdown. Oh well, another day of confusion about the future.
But one thing is for sure, the US dollar is on a tear. Yesterday, we saw a breakout above prior intermediate-term highs from early February in the US dollar index:
Oh Mr. Buffet! Mr. Buffet! Where are you?
Yes, we are waiting for the sage to publicly capitulate to the dollar trend. And frankly, we can hardly contain our glee in anticipation of such an event. Based on Mr. Buffet’s replication appeal, his capitulation will probably lead to capitulation on the part of his bridge playing buddy—you know, the one with the glasses—Bill something or other. That might be worth a few PIPs on the dollar, we would suspect.
Sorry, just couldn’t resist that.
The tanking of commodities yesterday probably had something to do with the dollar rising. After all, commodities have represented a real store of global purchasing power because the major commodities are priced in dollars. Weak dollar means higher commodities prices, assuming everything else remaining equal, as the economic textbooks like to say (they use Latin however when they say it, sounds more impressive). So, everything else remaining equal, strong dollar equals weaker commodities prices. But as we know, in the word of continuously fluctuation prices and expectations about prices based on a future we can only dimly guess at—besides the element of individual human action at a point in time—NOTHING EVER REMAINS EQUAL in the real economic world.
What we talked about in yesterday’s edition—risk induced move in the dollar—still seems to make sense one day later. Key point, besides the unwinding of commodities is the action in the bonds. The dollar rally was predicated on strong retail sales yesterday—we were told. But if retail sales were the drive of the dollar move yesterday, suggesting the growth element—why did long bonds rise in price? We think there is a lot more going on beneath the surface of this market than just a few economic reports.
The dollar move has been impressive of late. But we have probably only witnessed the tip of the iceberg. If the big boys show their cards and capitulate to the trend, it could get very interesting very quickly.
Black Swan Capital
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