Planet Yelnick

Interim Bulletin - Wave 2 Lives!

Yelnick is visiting Middle Earth (NZ), where it is said, Frodo lives! Or certainly, Peter Jackson lives, and after his dalliance with remaking King Kong, is expected to turn back to do The Hobbit. In a similar fashion, this stock market lives on, pursuing its own fantasies of good and evil, bull and bear. Prechter thought the wave 2 high was last Feb, given a confluence of time, level and other factors. After a dalliance with re-electing W, stock markets got their C wave legs. The post election rally has taken all major indices above their prior interim highs in the first quarter of 2004. The Dow was the last to breach. Consequently, we are still in wave 2. It will take a bit more to change the count to a new bull leg up. This is a bit of a relief to Elliotticians, actually, as the drop off last Feb's wave 2 high has been anything but representative of the expected wave 3 of 3 of 3 etc. down. Enjoy next week's Santa Rally, and watch carefully in early Jan to see if this wave 2 finally ends. The longer it goes, the sharper the end should be.

Call Your Bottom Dollar

The Dollar bottomed on Monday, as Yelnick predicted (ok, you get lucky sometimes), and ran up sharply Wed. It is up a bit today. Wednesday's sharp up move may reflect a short squeeze on all the Dollar bears. We are at the start of a multi-month move up in the Dollar, but there may be a test of Monday's low first.  The sharpness of the rise off the bottom, and of the fall in Gold (see chart, courtesy of The Rude Awakening newsletter from The Daily Reckoning) suggests a sell-off before a continued rise in the Dollar and fall in Gold.  Look for the Dollar to sink before a stronger and longer up move, but not to sink below Monday's low. The strong Dollar move may not happen until Jan, when we also expect stock market weakness after a year-end Santa Rally. (If the Dollar breaches its Monday low, look for a Grinch Gulley this Xmas.)

China and other Asian countries - notably, other than Japan, which appears to be intervening to keep the Dollar above 100 Yen - have been quietly diversifying out of the Dollar and into the Euro and Yen. There is some talk of a YES (Yen Euro $) reserve basket of currencies. YES is a no no for the Dollar. The oil trade is carried in Dollars, and allows the US to borrow excessively overseas since so much of the exchange from countries like China and Japan is used by them to buy oil with their excess Dollars. A YES currency for oil would greatly restrict the US ability to finance from overseas sources its trade and budget 'twin deficits.' (Note that one of the many reasons why France and Germany opposed us on the war in Iraq is that Iraq was the only oil country of size to trade in Euros not Dollars. It would greatly benefit the Eurozone to have its currency take over for the Dollar.)

The Dollar Perfect Storm is Coming

More on the Dollar from Stephen Roach, the chief economist at Morgan Stanley.  The Boston Herald leaked his private predictions being made to mutual fund managers in Boston (one can meet over a Trillion Dollars under management in an afternoon in Boston).  He sees that we have no better than a 10% chance of avoiding an Economic Armageddon.  He sees a 30% chance of a slump soon,  and a 60% chance that "we'll muddle through for a while and delay the eventual Armageddon.''

It is worth reading this story.  Yelnick's view is that either the Dollar bounces now, as Prechter predicts, or in January, after we get the Holidays behind us; or the Perfect Storm may be upon us. 

Repatriate Your Bottom Dollar

BrainFood this week lays out why the Dollar is about to bounce: the one-time tax shelter for repatriation of Dollar holdings overseas by US corporations. Intel last Thursday on its quarterly call discussed the need to manage foreign holdings and currency fluctuations, showing that leading US corporations will act to repatriate.  The falling Dollar is causing reduction of holding foreign reserves in Dollars, notably by China, which accelerates the fall, as the propensity to sit on Dollars from foreign trade lessens.  Repatriation causes US corporations with foreign holdings to exchange back into Dollars.  Hence as these two counter trends unwind, look for the Dollar to rise. 

Reading the Greenspan tea leaves, BrainFood lays out a broader strategy of Greenspan to attempt to engineer a soft landing for the Dollar after 40 years of excess.

Bet Your Bottom Dollar

The Dollar may have bottomed today.  It seems everyone expects a further drop.  Look for a multi-month rise while at the same time all the other major markets to begin their decline.  Oil already started a with fast drop, bonds are already dropping with yields rising, and stocks seem to be ready to turn south: the Dow hit the 78% retracement today in both time and level; the S&P is closing in on its 61% retrace from the 2000 high.