Are We Wrong About The US Dollar and Crude?

U.S. Stocks Rise a Third Day as Gold Tops $1,000, Dollar Falls

By Jeff Kearns
Sept. 8 (Bloomberg) -- Stocks rose worldwide, driving the Standard & Poor’s 500 Index higher for a third day, as gains in metals boosted the profit outlook for raw-material companies. Gold climbed above $1,000 an ounce as the dollar fell.
Alcoa Inc. and Chevron Corp. advanced more than 2.1 percent as bullion reached an 18-month high, copper added 3.1 percent and oil surged 5.1 percent. General Electric Co. gained 4.5 percent after JPMorgan Chase & Co. recommended buying the shares, saying expectations for the company are too low.
The S&P 500 rose 0.6 percent to 1,022.75 at 12:50 p.m. in New York. The Dow Jones Industrial Average climbed 27.81 points, or 0.3 percent, to 9,469.08. The MSCI World Index of equities in 23 developed nations advanced 1.1 percent after Credit Suisse Group AG said investors should favor stocks over bonds and cash.
“The economy is growing again around the world, and that’s the big thing for stocks,” said Howard Ward, who helps oversee $21.3 billion as chief investment officer for growth equities at Gamco Investors Inc. in Rye, New York. “We’re looking at a global synchronized recovery right now. Industrial activity in most of the developed and developing world has turned up.”
Stocks also rallied after the International Monetary Fund’s Dominique Strauss-Kahn said the crisis phase that toppled Lehman Brothers Holdings Inc. in September 2008 is “almost certainly behind us.”
Metals jumped after Goldman Sachs Group Inc. raised its forecasts because of “increasing evidence of a stronger-than- anticipated recovery in global industrial activity.”
Nine-Year Rally
Gold futures rose to the highest price since March 2008, reaching $1,009.70 an ounce in New York. Bullion rose to an intraday record of $1,033.90 18 months ago and is rallying for a ninth straight year.
Copper advanced 3.1 percent to $2.9540 a pound in New York, gaining for a fourth straight day. Lead rallied 4.5 percent to the highest price since May 2008 in London.
“The fact copper is up so much says recovery is ongoing and on track,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “Weakness in the dollar is helping to boost gold, copper, oil and other commodities because a weaker dollar means commodities, which are priced in dollars, become more expensive.”
Copper for delivery in three months will surge 21 percent in London through the end of 2010, Goldman Sachs analyst Jeffrey Currie wrote in a report today. Prices of the metal have more than doubled this year.
Dollar Weakens
Oil futures rose 5 percent to $71.51 in New York as the weaker dollar increased demand for commodities as a currency hedge. The Dollar Index, which tracks the currency against those of six major U.S. trading partners, fell 1.2 percent to 77.11.
Ministers from the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to set production targets. Saudi Arabian Oil Minister Ali al-Naimi said the market is in “good shape,” with price between $68 and $73 a barrel satisfactory for both consumers and producers.
Alcoa rose 3 percent to $12.54, while Chevron added 2.1 percent to $70.42 as raw-material and energy stocks in the S&P 500 rallied 1.5 percent and 2.6 percent, respectively. Allegheny Technologies Inc. rose 7.2 percent to $31.92 for the biggest gain in the S&P 500 after the specialty-metals producer signed a 10-year supply agreement with Rolls-Royce Plc that may generate as much as $1 billion of revenue.
Credit Suisse forecast gains in equity indexes worldwide ranging from 12 percent for Europe to 23 percent for Japan through mid-2010 as the economy recovers.
‘Best Phase’
“This is the best phase of the economic cycle,” a team of Credit Suisse strategists led by London-based Andrew Garthwaite wrote in a note today. “Many economic and financial variables are back to pre-Lehman levels.”
GE climbed 4.5 percent to $14.49. The largest locomotive maker and owner of NBC Universal was raised to “overweight” from “neutral” at JPMorgan, which cited the company’s potential for an “upside surprise.”
Kraft Foods Inc. fell 5 percent to $26.69 for the steepest decline in the Dow average. The second-largest food company said it will pursue a takeover of Cadbury Plc after the maker of Trident gum and Dairy Milk chocolate rejected a 10.2 billion- pound ($16.7 billion) bid.
Cadbury, which soared 38 percent in London yesterday after Kraft’s announcement, surged 38 percent in the U.S., where markets were closed yesterday for the Labor Day holiday.
The MSCI Emerging Markets Index added 1.8 percent, climbing for a fourth straight day. Russia’s Micex index jumped 3.4 percent as oil rose. Russia is surpassing Saudi Arabia in oil exports for the first time since the Soviet Union’s collapse in 1991. China’s Shanghai Composite Index gained 1.7 percent.
Global Growth
“Confidence is growing that we’ve entered a period of global growth again,” said Ken Brusda, who manages $700 million at North Star Asset Management in Menasha, Wisconsin. “Rising global demand is going to increase prices, and also the weak dollar contributes to that as well.”
American International Group Inc. dropped the most in the S&P 500, sliding 9.9 percent to $36.10. The insurer bailed out by the U.S. government was cut to “underperform” from “neutral” at Credit Suisse following a surge in the stock. AIG rallied 245 percent last month.

The US dollar is not behaving as we anticipated a few weeks ago. We expected the completion of bottom formation and a sharp upward swing. Clearly this has not taken place as the dollar continues a gentle downward trend. We still anticipate a temporary upswing in the US dollar and subsequent downward trend in the Canadian dollar, crude oil and to a lesser extent gold however, the bottoming process is more lengthy than expected.
We would like to remind readers of the connection between the dollar weakness and stock market strength. Several indicators (including SOX) show that the stock market is ready for a reversal, which typically lends strength to the dollar and is bearish for crude oil and gold in the short term.
Of course, we could be wrong about a temporarily stronger US dollar, as currencies are notoriously difficult to predict. We assign only about a 60% probability to an upswing in the US dollar.
What we have been watching for is another shock to the financial system that will send investors back to the US dollar. Will unrest break out in China? Will all the accumulating risks in the banking system come to the surface in a way that will be difficult to deny? We don't know.
We do know that nothing has been accomplished to repair the financial system and correct its excess leverage. That by itself should be enough to make investors very wary.