Today’s comment is by Sean Hyman, Currency Analyst for The Sovereign Society.

On August the 8th, Russia declared war on Georgia. By the 9th, it was an all-out bloodbath. Reports show that over 2,000 people have died during that short time and over 100,000 people fled the conflict.

As you can see, war is never pretty.

This week, Russian President Dmitry Medvedev and Georgian President Mikheil Saakashvili are already planning to sign a peace plan. But still the damage has already been done – particularly to the Russian ruble.

Honestly, what happened to the ruble this week is pretty common during wartimes. So this begs the question: How does a war affect a currency?

Well, as I often say: Money hates instability. There is nothing more unstable and unpredictable than a war where anything can happen. You also never know how long one will last, who will win, and what will be lost along the way.

As an investor, you’re left to suspect the worst. That’s why most investors grab their money and run to safer, more stable countries until the coast is clear.

Russia Declares War and
the Ruble Sinks 4% in 5 Days

To this day, Russia still has a bad reputation for decades of shady dealings. As such, investors never seem to fully trust the Russian markets. If a conflict breaks out, investors rush in and grab their cash even faster than they would another country.

And that’s exactly what happened when Russia declared war on Georgia.

Check out the chart of the U.S. dollar vs. the Russian ruble below. You’ll notice the ruble tanked over 4% in just 5 days after war broke out.

With Leverage, You Can Turn that 4% move into 400% Profits

Now that may not seem like much to you. But you have to remember that small movements in currencies add up to a lot in trading accounts.

Spot Forex accounts are commonly leveraged 100 to 1 or even 200 to 1. So a 4% move can be magnified to equal a 400% to 800% move in just 5 days.

If you bet against the ruble just as the Russians declared war, then you would be sitting on some healthy profits right now. However, if you bought the ruble formerly because it has done well in this “energy/commodity” boom, then you probably watched your account sink into the negative territory over the last few days.

Most trading accounts can’t take 400% to 800% losses on their positions over a five-day period and survive.

So ruble traders really had a wild ride since this began.

Is the War Over Yet?

Let’s suppose for a moment that the war truly is over and things somewhat revert back to normal (a Russian normal anyway). If that happens, then Forex traders will probably see it as a buying opportunity and grab the ruble once again at bargain prices.

However, if the conflict isn’t truly over, or if another one erupts, then you will see the rollercoaster ride begin again.

It takes a strong stomach to invest in the ruble right now. Much of the time it has been a very profitable “one way bet” against the buck since 2003. However, in times like these, you never know what the Russians are going to do.

On the other side of the coin, if you’re pulling money out of Russia, you’d better hide behind another BIG country. So many traders ran to the U.S. dollar since it’s the “Big Brother” that might be able to protect them and their money.

However, other traders chose to run to the “risk adverse” currencies of the Japanese yen and the Swiss franc. Both of these currencies have torn a chunk out of most currencies over these same five days with the exception of the U.S. dollar.

Right now, the buck can’t seem to do anything wrong and is rallying against any currency I have on my screen.

So war really “stirs the pot” because it not only causes money to run away from the country at war but also it has to find a hiding place. That hiding place won’t be the same for every investor. It may be two or three of the other biggest currencies in the market.

Bottom line: Money tends to run for cover at the first sign of conflict and tiptoes back in later after the conflict ends. Something to keep in mind the next time a war breaks out…

SEAN HYMAN, Currency Analyst

P.S. As I mentioned, the easiest ways to profit from short-term moves like these is in the spot Forex market. My colleague, Jack Crooks gives his subscribers short-term plays every single week in his service, The Money Trader. Basically, he tells you when to buy, what to buy and when to sell so you can grab the next 400% winner in the spot market. Find out how he does it in his brand new report.

You’re Just One-Penny Away From Early Retirement…

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And they did it with price changes of just a single penny…

This May Be a Stock Bottom -
But It Doesn't Mean the Bull Is Coming Back

Don't look now but U.S. stocks are trying to rally. In fact, it looks like stocks are about to muster a bear market bottom this summer.

Here's how I can tell: On Tuesday, we saw more credit-related losses from JP Morgan Chase that pushed down stocks. In fact, both the Dow and the S&P 500 Index finished well below their session lows.

Normally, a bad day for banks would result in a much deeper loss for stocks. Gold prices also declined on Tuesday despite a bad session for banks.

Now don't get me wrong; I'm still super cautious at these levels. The credit squeeze is still in full swing and several indicators continue to point to stress across short-term borrowing rates, CDOs, commercial paper markets and declining loan volumes.

But a few developments have occurred over the last few weeks that are undeniably bullish for common stocks.

I'm relieved to see inflationary pressures starting to ease. I'm disappointed to see oil and gold head lower because I'm a long-term bull, but they've enjoyed a sizable advance over the last few years and a correction at this point would be a good thing for the global economy.

Also, the technical picture for stocks in the United States looks much better than foreign markets. Many foreign markets are still struggling and actually are down in dollar terms since the beginning of July. China, the Mother of all Bubbles before last summer, is now down a blistering 53% in 2008.

Once the credit markets eventually stabilize and the government pours even more money into the battered financial system, the stock market will begin to recover. It's highly likely that the Fed will create another "bubble" as investors and speculators return en masse to boost returns in a low-yielding world. U.S. stocks might be the recipient of the next big rally.

The bull, however, isn't coming back.

The conditions won't be in place for a bull market because interest rates are starting from a low base to boost earnings and inflation will remain problematic. Credit stress, a long-term secular event, will also drain corporate finances. But it's fair to assume a big counter-cyclical bear market rally might ensue, possibly taking the Dow above its October all-time high.

The summer is typically a bad time to buy stocks. Yet, as we approach the fall and progress into the fourth quarter, I think we might see a sizable rally following four straight quarterly declines.

If the dollar continues to strengthen, the best strategy will be to focus on the S&P 500 Index (large-caps) and S&P 600 Index (small-caps). U.S. stocks will dominate any rally while international bourses trail on the weight of weaker currencies, especially in Europe.

ERIC ROSEMAN, Investment Director

Welcome to the Olympics...and Big Brother Part II

Yesterday, I told you about the many invasions of privacy you're facing if you traveled to Beijing for this summer's Olympic Games.

Basically, nothing is private in China. There are cameras in every taxi, every upscale hotel room, monitors on your Internet browsing and screeners for your emails.

But that's not even half of it.

Once you return to your hotel room, you may notice a few hidden additions to your laptop, cell phone, Blackberry, or other portable electronic device.

In just a few minutes, security officials can sneak into your room and copy all data off any electronic media you've brought with you. This includes your laptop's hard drive, the contact list on your cell phone, etc. They can also plant software into any electronic device that effectively takes it over once you reactivate it. From that point forward, even after you return home, Chinese officials can monitor every keystroke on your laptop, your PDA, along with all conversations or text messages on your cell phone.

How likely is it that you'll be targeted? Since China requires most visitors to apply for a visa, officials will know in advance that you're arriving. And, if you're important enough, or if officials believe you possess important information that could be useful to China, you can probably count on the kind of reception I just described.

Cisco and other U.S. companies manufacture most of the equipment and software China uses for this type of surveillance. And increasingly, it's being adapted for use in other countries, which means you can expect more and more pervasive surveillance, wherever you travel.

How can you protect yourself? For once, the U.S. Department of Homeland Security actually has some good suggestions for foreign travel:

"Protective measures should include using designated 'travel' computers, single-use cell phones, temporary email addresses, as well as refraining from communicating with a home organization's information technology systems."
When you return, simply discard your cell phone and temporary email address. And "wipe" your computer clean before you leave and after you return, using a utility such as Killdisk.

Enjoy the Olympics!

MARK NESTMANN,
Privacy Expert & President of The Nestmann Group
www.nestmann.com

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