Stock Market News

The Smart Profits Report: Issue #461
Wednesday, October 3, 2007

Stock Market News: Gold & Oil Reach Upside Targets As The Dollar Falls
By Martin Denholm
Managing Editor, Mt. Vernon Research

I’d barely ripped the month of September off my desk calendar and turned to October before the stock market was off to the races on Monday morning. Fresh off a quarter in which the Dow Industrials posted a 3.6% gain, the index blasted past 14,000 for the first time since July. It gained almost 200 points and hit new all-time intraday and closing records of 14,147.30 and 14,087.55 respectively. Elsewhere, the tech-stuffed Nasdaq Composite bounced to its highest level since February 2001, while the S&P 500 and small-cap Russell 2000 rose 1.3% and 2.4%.

But hang on a second… what about the subprime mess? Rising oil prices? Higher energy and food prices? The trainwreck dollar? The sharp spike left some folks scratching their heads. Plus, Citigroup (NYSE: C) and UBS (NYSE: UBS) announced some pretty awful earnings guidance, due to their subprime exposure.

So is the investment glass half-full, or half-empty? Let’s take a look at the most recent stock market news…

The Nasdaq 100 Leads The Way…

If you read last Thursday’s article from my colleague and technical analyst Jim Stanton, you’d have seen this move coming. Jim stated: “As the market has rebounded, the Nasdaq 100 has led the way, impressively surging to new 6-year highs this week. Obviously, this is a bullish development that should lead to higher prices. But… while the Dow Industrials and S&P 500 are within striking distance of setting new all-time highs, they need to do so in order to confirm the rally.”

Bingo. It only took the Dow two days to come through. And the S&P 500 is just 10 points away. On Monday, 28 of the 30 Dow Industrials finished higher, despite an ugly warning from Citigroup that third-quarter earnings would plunge 60%. The reason? That pesky subprime sector again, with the company swallowing a $3 billion loss on subprime exposure. Not to be left out, UBS also announced that it will take a $3.4 billion third-quarter write-down and post a loss.

Glass half-empty? Not quite. Industry barometer Citigroup said it was likely to be a one-time hit, with better prospects in the current quarter. So rather than triggering more strife, investors figured the worst is over and promptly sent the market barreling higher.

But Citigroup wasn’t finished talking. It decided to upgrade several big homebuilding stocks, too. Eh?

Real Estate Continues To Endure The Gloom

Real estate has endured a savage few months and more gloomy projections are everywhere.

Falling new home sales.
Falling existing home sales.
Today’s news that pending sales fell to a record low in August, declining house prices.
Record high foreclosures.
A 16-year housing supply engulfing demand.

The list goes on. But that didn’t stop Citigroup from upgrading homebuilders. But it believes those with stronger balance sheets will fare well. And like clockwork, several large-cap homebuilding stocks rose.

Man, are these Citigroup guys bankers or cheerleaders? You’d think that having got burned on the subprime sector, they would keep real estate predictions to themselves. Maybe they should just grab their pom-poms and start waving them around in the middle of Wall Street. Must… buy… homebuilder stocks.

Let’s get serious here…

The Stanton Synopsis On The Sad, Sad Dollar

While Citigroup waffles and the stock market does its thing, many eyes are still trained on the U.S. dollar - the Fed’s favorite piñata.

As Bernanke and his boys bash away at the greenback, the U.S. Dollar Index (which measures the dollar against a basket of other currencies) slumped to a 40-year low below 78 last Friday. The euro is hovering at its highest level against the dollar since it began trading in 1999.

And since his market analysis was spot-on, I asked Jim Stanton for his take:

“Needless to say, the dollar weakness has set up the ‘perfect storm’ in commodities. Not only has worldwide demand increased dramatically, especially in China, but the slump has also helped push oil and gold prices even higher.

“It’s no secret that Wall Street bears have mauled the dollar for a while now. So far, they’ve been right. But it’s worth remembering that since the late 1970s, the Dollar Index has tested the 78-80 area six different times. And each time, it has rallied. We can expect that to happen again, at least in the short-term.

“Since hitting a new low last Friday, the index has rallied over the past two days. I expected some short covering in the dollar around this level, but it just so happens that with the oil and gold markets simultaneously reaching their short-term upside targets over the past few days, both commodities have seen some selling pressure today.”

Stock Market News On The Dollar, Oil And Gold

Thus far, the dollar’s slide has boded well for commodities. Last Friday, crude oil hit an all-time high of $83 a barrel, meaning that September saw oil’s biggest month-over-month price rise in three years. Meanwhile, gold hit a 28-year high of $746.50 an ounce on Monday.

Oil: The decline from $83 on Friday back to $80 today gives weight to the idea that the current fundamentals do not support the current high price. In the long-term, however, prices will remain high. Slow export growth, constant supply fears (due to geopolitical issues, weather and natural disasters) and the sluggish pace of new reserve discoveries are the main reasons.

Gold: When the dollar goes down, gold goes up. It’s a pretty reliable, time-tested relationship - and we’re seeing it again now. With the greenback finally showing some fight, gold prices took a beating today, sliding almost $18 to around $736. The price has remained above $700 for three weeks now, which is an impressive streak. But unless the dollar drops back down again, gold could drift or consolidate for a while.

Of course, if the Fed decides to cut interest rates again at the end of the month, all bets are off. And with the Institute for Supply Management saying that the U.S. manufacturing sector grew at the slowest pace in six months in September, the Fed could make a move.

The Dollar: As Jim says, “If the dollar continues to strengthen, it will probably take the froth out of the gold and oil markets and we could see the stock market pull back. With historical support around 78-80, a change in the trend is possible. But it may just be undergoing an oversold bounce before the downtrend resumes.”

Either way, the Fed may have done the damage already. Former Fed chief Alan Greenspan believes it will take double-digit interest rates to restore the dollar’s long-term value (easy for him to say, now that he’s retired!) In the meantime, commodities like gold and oil remain a pretty solid bet.

Best regards,

Martin Denholm

Today’s Smart Profits Action Center

Over the past few days, we’ve seen some big moves in stocks and commodities. When you get big moves like this - whether up or down - it’s a good time to execute a professional options strategy known as a “strangle.” Not many “ordinary” investors have even heard of this, never mind thought about using it. But in Thursday’s message, our commodities expert Lee Lowell will show you exactly how to use this technique to build wealth. In the meantime, check out his column on the strangle’s sister play - the options straddle in Smart Profits #458, Option Straddles: Don’t Worry Which Way Stocks Are Headed… Here’s How To Play The Upside And Downside

The Nasdaq is still the lead dog. While the Dow Industrials backed off from Monday’s all-time high and shed 40 points as investors took some profits, and the S&P 500 remained flat, the Nasdaq nudged ahead by 6 more points. In closing at 2,747.11, the index set another new high. The next big market mover could be Friday’s September job report.

With the Canadian dollar having now hit parity with the U.S. dollar (it set a 31-year high of $1.009 on Monday), the next in line to do the same is the Australian dollar. Second-quarter GDP growth hit 4.3% from a year earlier - the fastest pace in three years - as the country’s strong commodity-based economy continues to bolster the Aussie dollar. And with 4% GDP growth expected “Down Under” in 2008, that trend is set to continue.

The U.S. dollar may be in trouble… but that doesn’t mean you have to sit back and watch it. Discover the secret of the “Max Yield” strategy that will allow you to cash out on the U.S. dollar and cash in on the world’s best-performing currencies. It’s one that could bag you $425,000. Click here for more details.

Related Articles: