Thursday, July 24, 2008 - Vol. 10, No. 175 Today's comment is by Jack Crooks, FX-trading Expert and editor of World Currency Options and The Money Trader. It seems everyone's most hated "asset," the U.S. dollar, is heading north. (By the way, most don't even consider the dollar an "asset," so the fact that the dollar is gaining is a good indication that we may be approaching a sentiment extreme.) This could be just knee-jerk optimism over yet another rescue package from our Heroes on the Hill. Ben and Hank are back to solve this credit crisis once and for all. But maybe it's something entirely different than that. Here is a short story for you to ponder if you wish. Quite frankly, this story could still be fiction, but stranger things have happened in the world of finance. Not too long ago, I wrote about how we were seeing an interesting story play out in crude oil. Specifically, it seems the crude oil — U.S. dollar correlation was becoming a bit less correlated. Now, correlations typically ebb and flow, but it was still odd that the dollar didn't make a new all-time low when crude oil blew off to a high of US$150 per barrel. In fact, the all-time low (measured by the U.S. dollar index) came when crude oil was around US$104 per barrel — that's dirt cheap in retrospect! Since then, oil prices have climbed 44% and the dollar has actually rallied slightly. Since When Does the Dollar NOT Go Against Oil Prices? Increasingly, the majority of oil companies are shedding profit margins because refining margins are being squeezed. So, despite another $46 dollar blow-off move in oil, the U.S. dollar continued to hover above its low (which incidentally was made on the same day Bear Stearns was "saved"). What's happening? What's Going On Here? I See Three Possible Scenarios Scenario 1: Perhaps oil producers aren't running from the dollar like they used to. Maybe they were "convinced" a bottom is near (that could be thanks to consecutive visits, and carrot stick schmoosing, by V.P. Cheney, President Bush, and Treasury Secretary Paulson, who made consecutive trips to the major oil-producing region beginning in March). Scenario 2: It is a correlation — and correlations by their very nature can be nebulous and useless at times, especially over short-term time frames. Scenario 3: Falling global demand for oil is leading to a closing of the crude carry trade. Say what? Yes, it is a theme I've been working on/thinking about/conjecturing about...and it goes like this: 1. Country X, a non-oil producer, needs to import crude oil, which is invoiced in U.S. dollars. 2. Country X notices the dollar price of crude rising and the dollar falling, so Country X decides to borrow dollars to buy crude. And over time Country X notices that paying back those dollar loans is costing less and less. So, why not continue to make this trade, using less of Country X's government budget to buy crude directly, why not just keep borrowing more dollars? 3. Now this is the tricky part that we have been thinking about, but can't confirm with hard numbers. But I have a hunch that two things are changing that lead to a closing, or reversing, of the crude-carry trade: The credit crunch i.e. access to available credit is making it harder to borrow dollars Falling domestic demand for energy, because of slowing growth in Country X, means there is less oil needed to support the economy. Thus, the need/ability to borrow dollars to pay for crude declines. And as this pressure is relieved, the dollar stabilizes and even rises relative to Country X currency, especially if Country X is of the emerging/developing nation variety where central banks are way behind the inflation curve. How You Go from a Credit Crunch to a Strengthening Dollar This is a classic self-reinforcing process...lack of global credit leads to slowing global growth....which then leads to slowing oil demand....which leads to more closing of the Crude Carry Trade...which leads to change in dollar sentiment...which leads to new price trend leading short-term players, and that leads to dollar perma-bears finally surrendering their eternal anti-dollar position. Apparently our leaders whispering "the dollar is nearing a bottom" softly into the ears of the Gulf States is paying big dividends — especially to a world that desperately needs its defacto central bank (the U.S. Fed) to have a bit of credibility in the form of value flowing credit. And with crude falling and the dollar rising, a little allocation from oil producers back into dollars starts to make some financial sense. This just reinforces this trend. Still a Theory, But Could Become a Fact Remember: This is just a theory. I could be wrong. But the premise makes sense. The probabilities of all this happening exactly as I hypothesized... well, that's anyone's guess really. But as I said before, thinking about alternative themes and staying open to the market information flow is all we can do to position ourselves for the next big move, no matter what we trade. And here at the Agora Financial Symposium in Vancouver, I've yet to hear one person say anything good about the dollar. All I can say is: Don't hate! There is still a chance we can avoid Banana Republic Land after all. Until I get confirmation on that...I'm open to all possibilities - the ONLY way to stay nimble in the currency markets. JACK CROOKS, Editor of World Currency Options and The Money Trader EDITOR'S NOTE: In order to stay "nimble" in the markets, Jack constantly checks and rechecks his trading strategy. For example, Jack had 487 "beta-testers" try out his strategy in February 2007. Jack gave this small group of average Joe investors the opportunity to make hundreds of dollars a minute...and over the course of that month, this small group of investors had the opportunity to make US$28, 043 - by following Jack's formula. Find out exactly how they did it...Get the details here.

Internal Sponsorship

Fannie Mae/Freddie Mac FAILURE Creates Immediate Profit Center! We’ve all known the dollar has been “under water” for years. But now, the Fannie/Freddie bailouts are going to flush it right down the drain. Why? Because the bailouts mean that trillions more cheap dollars will flood the U.S. economy — only fueling the fire of a weak buck further…But fortunately, with turmoil comes opportunity... Click here to read the full story of how 487 people will turn this “paper-money-printing” debacle into a profitable hobby.

Offshore:

Let's Say You "Forgot" to Pay Taxes: What Do You Do Now? If the IRS intensifies and continues to crackdown on offshore bank accounts, a few wealthy Americans, who may have used their offshore accounts to illegally shield income, are facing a difficult decision: Should they turn themselves in? And if so, how? Here are some pros and cons of the approaches I have seen over the years, after advising readers and working with leading tax attorneys. The ostrich approach. This is by far the worst approach. Basically you bury your head in the sand and hope the storm clouds will blow over. This might work if you're confident your name won't be discovered - but no one can reasonably believe that. Tax lawyers say the odds of getting caught have grown rapidly because of the increasing number of nations pursuing tax cheats. Ostriches also risk getting hit with very stiff penalties, and possible criminal sanctions, just for failing to report foreign financial accounts. • Voluntary disclosure. Some people hire experienced tax lawyers to test the waters with the IRS, initially always on an anonymous basis, to see what might happen if they voluntarily turn themselves in and pay what they owe in the hopes of avoiding jail. This is sometimes known as a "noisy disclosure," as opposed to the quieter approach of just filing amended returns and hoping for the best. My advice is never to approach the IRS yourself - always go through a reputable tax lawyer who has good IRS contacts, and thus you are under the protection of lawyer-client confidentiality. One lawyer told me the IRS is "more sympathetic to people who have seen the light, rather than the light seeing them." An IRS spokesman cautions that a voluntary disclosure "will not automatically guarantee immunity from prosecution," but it "may result in prosecution not being recommended." BOB BAUMAN, Legal Counsel P.S. Honestly, it's not as hard as it sounds to go offshore but still stay on the IRS's good side. In fact, an offshore bank just requires a single extra form filed each year. This November, my colleagues and I will be in Cancun Mexico to give you all the ins and outs of setting up your finances abroad to make it easier for you. At this one weekend-long seminar, you'll learn how to take your retirement plan offshore, set up your estate plan abroad, establish an overseas trust, and invest all around the world. Join us for the third annual Offshore Advantage Academy to find out all this and more. (A word to the wise: This seminar sells out every year, so reserve your seat now while you still can.)

Wealth:

What the SEC Really Accomplished with their New "Short-Sell" Rule Bear markets tend to rear the government's ugly head. In my book, the less government intervenes, the better. Markets should be allowed to function freely, as long as market participants use transparent reporting. Sometimes, however, the government has to intervene when investors are unfairly punished or defrauded. This was the case earlier this decade during the Enron, WorldCom, Tyco, and the Spitzer mutual fund-timing scandals. Millions of investors were victimized, defrauded, and CEOs were subsequently sentenced or heavily fined. But now the rules are about to change. It looks like short-sellers are the new target in the United States, the United Kingdom, and Australia. In an effort to curb speculation in financial services stocks, the United States Securities and Exchange Commission (SEC) have introduced new short-selling rules for the next 30 days. These changes bar institutions, mainly hedge funds, from shorting financial stocks. The government has issued a list of 19 commercial and investment banks that cannot be shorted. The SEC, announced these new rules last Tuesday after financial stocks plummeted for the second day. This announcement triggered a massive 17% rally for the bank index on Wednesday. The new short-sale rule was probably the biggest single factor contributing to the rally. So will this new rule help financial stocks and their devastated shareholders? The answer is probably not. Though the government has identified 19 financial institutions to be protected, this leaves a few hundred more that remain even more vulnerable as a result of this legislation. Also, hedge funds and other speculators will find alternative targets. If a financial stock deserves to be priced lower, then it should trade at a discount to other more profitable companies. By isolating 19 companies, the SEC has invited vultures to the party as hundreds more are now fresh targets that are not protected by the 30-day rule. Don't blame the hedge funds for the woes afflicting the financials. The real blame falls on poor financial supervision, poor government regulation, and rogue CEOs that went absolutely wild issuing mortgages to sub-par applicants. And don't forget Wall Street. Investment banks, the largest of which are now protected by the Feds with the new short-selling rules, where the largest issuers and innovators of mortgage-backed securities tied to synthetic derivatives. ERIC ROSEMAN, Investment Director

Internal Sponsorship

Diversify Outside the U.S. Dollar into special investments from government-guaranteed precious metals programs to foreign CDs and undervalued real estate. Safeguard Your Wealth in asset havens from Europe to the Americas to Asia. Invest Freely in top global stocks, bonds, funds, currencies, commodities and structured products that have crushed the performance of the broad stock market. Enjoy Privacy, Security and Tax Advantages that were previously the reserve of the world's wealthiest families...yet are now available to you. These are just a sampling of the many financial benefits available offshore. Yet, there's a huge difference between knowing these opportunities are available...and knowing how to make them actually work for you... Learn how you can master the ABCs of the offshore world in just four days