Strong dollar smashes stocks

Haven inflows into the dollar are upending the entire risk-on complex of commodities, foreign stocks and precious metals.

By Anthony Mirhaydari Nov 2, 2012 4:45PM

$100 bills growing in grass -- REB Images, Blend Images, Getty ImagesAfter Superstorm Sandy closed the New York Stock Exchange for two days -- the longest weather-related closure since 1888 -- the week has been a bit of a snoozer.


That all changed Friday as the selling pressure I've been warning about returned, thanks to a strong breakout by the U.S. dollar, something that hasn't been seen since the May market meltdown.

 

This is a big deal, since hedge fund types sell the dollar short to leverage their trades in areas like gold, silver, oil, copper and foreign issues. So when the dollar rises, these trades are reversed and selling begets selling.

 

Why is this happening? And will it continue?

 

 

I can see a number of reasons that the dollar was bid Friday, including unresolved political issues like the fiscal cliff of tax hikes and spending cuts worth some 5% of GDP, the real-time unraveling of the social fabric in New Jersey and elsewhere as citizens scramble for fuel and food, and a deterioration of the situation in Europe.

 

And from a technical perspective, the dollar's push above its upper Bollinger Band has historically been a sign of uptrend initiation. I expect it to continue to rise into 2013.

 

 

I recommend my clients and readers continue to maintain a neutral to defensive positioning, raising cash and moving into Treasury bonds while using targeted short positions against weak areas such as energy and foreign stocks.

 

Internal measures of market strength remain unimpressive, with fewer stocks holding the market at current levels as buyers find fewer and fewer issues compelling at current prices.

 

Also, the widening divergence between both CEO and investor pessimism and consumer confidence (which by one measure has hit a new post-recession high) has me convinced households haven't prepared for the political turbulence about to hit Washington after the election.

 

It's like this: Don't expect a fiscal cliff deal unless we get another credit rating downgrade and/or we suffer through significant and painful financial market turbulence that damages the real economy at a time of vulnerability given Europe's unresolved issues and China's attempt to reaccelerate without inflationary monetary policy stimulus. Democrats and Republicans can't strike a deal unless they're looking down the barrel of a loaded gun.

 

Speaking of Europe, the situation in Greece is deteriorating. Credit Suisse estimates the country needs another €24 billion to fund a two-year bailout extension. This will need to be provided by other Eurozone countries, either through direct aid or write-offs of existing holdings. Another idea, to buy discounted Greek bonds in the open market and retire them, would require recapitalization of Greek banks.

 

There is no easy answer.

 

Adding to the pressure is growing German resistance to more aid, Greek resistance to new austerity measures, and a fracturing of the ruling coalition government in Athens.

 

To summarize, there is simply too much political risk out there -- which is, by nature, unpredictable. CEOs and investors understand this and are doing things like cutting back hiring and spending plans and looking for safety in the dollar. Consumers distracted by Hurricane Sandy, the presidential election, and Halloween celebrations don't yet. They will.

 

In response, I am adding a new short position against Baidu (BIDU) to my Edge Letter Sample Portfolio. Current holdings include the ProShares UltraShort Oil & Gas (DUG).

 

Disclosure: Anthony has recommended BIDU short and DUG to his clients.


Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

34Comments
Nov 2, 2012 7:03PM
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The total inability of Congress to address ANY of these critical issues has put the entire country on a roller coaster ride which we have no idea when it will end.
Nov 2, 2012 6:48PM
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Here's my stock tip. Invest in guns and ammo company stocks.....and fast!
Nov 2, 2012 7:05PM
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The only thing that smashes stocks ids the manipulationgoing on on Wall street. No matter what the news is they are going to take gains away for the year under any kind of news.
Nov 3, 2012 11:39PM
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Gee our government ran great when we had moderates . In both parties .. So true.

Nov 3, 2012 1:04PM
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great article anthony - insightful, accurate, and thoughtful with solid technical explanations and solutions ... thanks ....  
Nov 3, 2012 12:24AM
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It is total hogwash that the Democrats are bad for the economy.  Check the records.
Nov 2, 2012 8:11PM
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the Dollar drops 5 to 10 cents its OK but wen it goes  Up 1 or 1.2 cents its some big deal noting but Smoke
Nov 2, 2012 7:34PM
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I agree invest in lead and brass and while your at it pick up some blue steel.  R&R 2012
Nov 3, 2012 10:49PM
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I disagree with what other people are saying about getting plenty of guns and ammo when things start getting really bad. 

I think it would cheaper and more practical to get yourself a white karate outfit to wear around! :)

Nov 5, 2012 12:59PM
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I'd like our dollar strong because it's rock solid backed by a debt free nation. Not because it's the least shakey debt ridden currency.
Nov 5, 2012 7:31AM
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November "stocks are smashed" -> DOWN
October 18th you said we were headed for new highs.  -> UP
September 26th Is the rally over? -> DOWN
August 16th "Epic Market Breakout Underway" -> UP

I predict that in December you will predict that the markets are going to go up.
Nov 5, 2012 10:19AM
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A strong dollar is GOOD for the USA!   It is interesting in light of the QE (money printing, totaling 58% over the last 4 years) that the US Dollar is stronger than the Yen, Euro and a host of other currencies.


Nov 4, 2012 12:14AM
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Sounds like it is time for real change. Vote Libertarian Gary Johnson.
Nov 4, 2012 11:12PM
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The house has passed an extension of current tax policy and a budget.  The Senate has been absent from the game.  So, after the election results are counted, the Senate will have to decide what to do.

 

First, the house will stay in the control of the Republicans.  Second, I would be shocked to see the democrats retain control of the Senate.  The question is it going to be a one vote margin, 5 vote, or 9 vote.  Regaurdless of who wins the Presidency, the Seante will act on the fiscal cliff.  They have no choice.  None of them want to be blamed for driving off the cliff.  Noone will care about extending the debt. 

 

If Obama wins, then the house will have to raise taxes on the rich.  If Romney wins, then the lame duck session will last all of about 48 hours.  Senate on voice votes passes the house already approved tax extension.  The debt limit is raise $500B.  Obama can sign or throw a hissy fit. 

 

Romney, will stand up and say, we have a bunch of work to do next congress, lets kiss and make up and move forward.

Nov 2, 2012 7:51PM
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Panic time at Christmas because of the strong dollar.

Inflation defeated, oddly enough is a good thing for the economy, maybe not Wall Street.

If Obama wins rich will be taxed, middle class will shrink dramaticly, nobody will have any money which will strengthen the dollar even further, and kiss the stock market goodbye.

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