Stocks pushed higher again on Friday. The Dow Industrials
broke above 11,000 and the S&P 500 moved closer to TradeMaster Jason Cimpl’s target
set five weeks ago of 1,172.
Still, these indices are below their 52-week highs of 11,309
and 1,219, respectively. That was back in April, after the European debt
problems prompted a massive lending program form the EU and 1Q earnings came
in very strong.
The situation is a little different now. Earnings have been
decent, and will likely continue that way. But economic data, while not
horrible, hasn’t set the world on fire. So the Fed’s promised some fuel for
that fire in the form of more monetary easing.
Affectionately known as QE2, another round of quantitative easing is a thinly veiled threat
to further weaken the dollar, with the hope of sparking an export- and cheap
money led economic moonshot.
Or, if you remember Greenspan’s response to the last
recession, you could say that the current Fed, led by Ben Bernanke, is trying
to blow the recovery bubble. After all, Greenspan’s bubble sure created a lot
of jobs in housing and sub-prime lending. Why not give it another
Aside from the fact that re-flating this economy is like
giving the breath of life to a CPR dummy, the U.S. isn’t the only country that’s trying to
encourage growth by weakening its currency.
On September 15, Japan cut interest
rates and intervened in the currency markets to sell yen and push the
currency lower. And last week, Japan
announced a $60 billion fund for monetary easing, which
would likely include more direct intervention in the currency markets.
Too bad Japan is overmatched by the Fed. Despite Japan‘s intervention and threat of more to come,
the yen has rallied 11% against the U.S. dollar since September 15.
Switzerland, South Korea and Brazil have also intervened in the currency
markets this year, to no avail. The U.S. dollar is significantly weaker
against every major currency except the Chinese yuan.
This might be a
good time to remind readers of an important investment rule: Don’t fight the
Quite simply, as the world’s biggest economy, the Fed will
get its way. Traders are making their money by probing the resolve of other
central banks. Japanese officials might be surprised that their efforts to
weaken the yen haven’t worked. But they are fighting the Fed…
It reminds me of the story of when George Soros broke the
Bank of England and made $1 billion in a day. I won’t be surprised to hear
similar stories about traders making wild profits from ineffective central
At the G20 met over
the weekend, Brazil‘s Finance
Minster said a currency war was underway. The meeting, which was held to
address currency disputes, failed to accomplish anything but a resolution
that the IMF should monitor the situation.
But of course, the IMF has no authority. And a few reports
on monetary policy won’t accomplish anything.
So what should investors do?
Don’t fight the Fed.
Gold will continue to rally. So will stocks. And so will
Right now, I like oil best.
On September 30, I informed readers about one oil stock from
Energy World Profits Portfolio, Brigham Exploration
(Nasdaq:BEXP). The stock
closed at $18.75 that day. As of Friday, it’s up 13% to $21.24.
And that’s not the only oil stock that’s running in the
portfolio. So long as the U.S. dollar is weak, oil prices, and oil stocks,
are a great place to be.
For more on Energy World Profits,
Of course, I’d like to hear your thoughts here: [email protected]