Just How Bad Can It Get for the Dollar?

Today's comment is by Jack Crooks, Editor of World Currency Options and President of Black Swan Capital.

Dear A-Letter Reader,

Recently, the dollar fell below the infamous 7819-level - the level it's managed to hover above since 1992. So the question is: Can dollar support that turns into resistance then become support again?

The buck has now bounced back above the magic 7819 number. But is this number meaningless? Is it expected consolidation before another surge lower? Or is it meaningful? And from a meaningful side, I guess the question would be: Is all the bad news already priced into the buck?

Bad News That We Know

• Fed "will" cut interest rates by another 50 basis points by March '08.
  
  
• The U.S. "will" be dragged either into or very close to the edge of recession because the housing market "will" get worse.
  
  
• Mr. U.S. Consumer "is" on his last legs - the consumer spending ballgame is about over.
  
  
• Europe "can" live with EUR/USD at 1.45-1.50.
  
  
• Gulf States "will" abandon the dollar peg and dump dollars.
  
  
• More countries other than Iran "will" begin selling oil in euro instead of dollars.
  
  
• The globe "has" decoupled from the U.S. economy.
  
  
• Current account deficits "do" matter (just don't tell Australia and the U.K.).

Bad News We Suspect

1. China will let its currency float much faster, and dump dollar holdings along the way (they're probably not too happy with surge in U.S. bond prices boosting their portfolio since mid-June).

2. The Fed "will" be forced to stall rate cuts in fear of a dollar disaster (which means bad news number one above may be in jeopardy).

3. The dollar's world reserve status is in jeopardy. The only problem here is to identify who fills the void, Everyone is guessing the euro may take over as the reserve currency, but I still suspect deep down many believe the European Monetary System will face a real test in the not-too-distant future.

4. U.S. assets "will" become increasingly unattractive (forget that U.S. multinational earnings are soaring and real estate is getting cheaper by the day).

I am sure you can think of more bad news about the US dollar. Just spend a couple of hours watching CNBC or Bloomberg TV if you can't.

The Good News About the Dollar Is Well, Um...

Now, for all the eternal dollar optimists out there, the next list contains all the good news that's readily available via our financial news product purveyors that, coincidentally, is priced into the dollar:

Hmmm...Sorry, Charlie!

None of the above is to suggest for one moment that the news can't get worse for our dwindling greenback. We have learned many times over that anything can and will happen in actively traded asset markets.

We know the consensus can be right for much longer than we think they "should" be. But today's comments are to suggest that maybe even a ray of good news for the buck may have an unusually large impact if such bad news is already "in the price."

JACK CROOKS, Editor
World Currency Options

EDITOR'S NOTE: The hits just keep coming for the dollar. So in response, Jack will reveal a bundle of currency options to his World Currency Options subscribers tomorrow. These options are designed to help you profit from this epic downfall in the dollar. He has a unique strategy lined up that includes the Canadian dollar, the euro and the Japanese yen. He'll reveal all this tomorrow in a special edition of World Currency Options. Don't receive World Currency Options? Sign up right now for a risk-free trial of his service, so you can receive this special bulletin tomorrow.

Stay Away from Nicaragua!

Over the past 10 years, we at The Sovereign Society have devised a reliable system to evaluate offshore jurisdictions. When doing our due diligence, we consider the nation's government and political stability, the judicial system, and the availability of legal entities such as trusts, financial privacy laws and taxes.

All of the other factors become meaningless, however, if the country's government lacks stability in general. Or worse: The country is openly hostile to free-market economics and the freedom of foreigners who do business there.

This brings me to the current sorry state of affairs in Nicaragua - where the radical leftist government has become openly hostile to capitalism and property rights.

Before he made a miraculous return to power last year as president, José Daniel Ortega Saavedra was a washed up extreme leftist. He won in last year's rigged election with less than 35% of the votes cast. But before that, he spent his previous term as president (1985-90) dragging Nicaragua into the Communist orbit of Cuba's Fidel Castro. His first term was characterized by Communist policies, seizing private property, economic suffering, repression of internal dissent, hostility towards the United States and armed domestic rebellion against his government by the U.S.-backed Contras.

For many years he has been a leader in the leftist Sandinista National Liberation Front (FSLN). He was defeated in 1990 (and twice more afterwards) because of his extreme views in a country that is far more conservative. During his five-year tenure, Ortega and other Sandinista bullies confiscated many private estates, businesses and properties for their personal benefit and never returned them to their rightful owners.

In his first week as President, Ortega met with and praised Iranian President Mahmoud Ahmadinejad. The two toured slums in Managua. Ortega told the press that the "revolutions of Iran and Nicaragua are almost twin revolutions...since both revolutions are about justice, liberty, self-determination, and the struggle against imperialism." Venezuela's radical president Hugo Chavez also visited Ortega, and Ortega again embraced Fidel Castro as his hero.

What's worse, from the point of view of possible foreign investors in Nicaragua, Ortega has aligned himself with Iran and Venezuela and seized an Exxon Mobil Corp. oil facility. In a recent United Nations diatribe, Ortega claimed that the "genocide perpetrated by global capitalism'' was responsible for "destruction, death and poverty.'' In his UN speech Ortega defended Iran and North Korea's development of nuclear power. "The enemy continues to be the same,'' he said, "and it's called global capitalist imperialism."

In the past two months Ortega's government seized an Exxon fuel storage terminal and also scrapped government contracts with a business owned by an opposition party leader.

As far as foreign investors are concerned, Ortega is returning to his Sandinista roots. Yields on the nation's debt have risen to the highest in Latin America. The increase marks a turnaround from earlier this year, when the former Sandinista guerrilla leader said he would improve relations with the U.S. Now, investors are growing concerned that Ortega is returning his 1980s policies, when the country defaulted and inflation topped 14,000 percent.

Land grabs were part of Ortega's socialist policies in the past. He restricted trading, boosted public spending and took over banks and supermarkets. At the time, President Ronald Reagan, called Ortega "a little dictator,'' and ordered a blockade of Nicaragua and funded the Contra rebels. The economy fell into recession, gross domestic product per capita fell by more than a third and debt rose to more than five times GDP.

Investors are concerned that nearly a billion in government bonds won't be repaid when they start coming due in 2008. "It's paper with zero value,'' says Marlon Gutierrez, an anti-Ortega activist in Miami who said his family lost 1,000 acres to the Sandinistas in the 1980s. "Nobody wants to put money in our country.''

And for very good reasons!

BOB BAUMAN, Legal Counsel

P.S. There are far better offshore places to invest your hard earned cash.For more information, click here

Wealth & Investments

Watch Out: It's Time for Another Earnings Season!

In my humble opinion, the Fed's latest bail out for Wall Street does have its advantages. Namely, this easy-money move should stimulate even more investment cash flows into red hot emerging markets. As if global investors needed another excuse to invest there.

Emerging markets already take top honors as this year's best performers. In fact, the MSCI Emerging Market Index has trounced the S&P 500 in terms of performance by a margin of better than 3-to-1 so far this year.

Emerging Markets Have Destroyed the
S&P 500 Earnings Since January

While the S&P 500 has rebounded from its credit-crunch induced summer slump, it's only posting returns of about 10% so far this year (see graph). Meanwhile the Emerging Market Index has already gained more than 35% - and counting.

In fact, a big part of the performance advantage for emerging markets has come since the August low, when expectations of a Fed rate cut began to gain currency. But it's not only about interest rates. There are a number of good reasons to favor emerging markets over the S&P 500 in this environment. Fundamentals, like sales and earnings growth is a very big reason.

After a record setting run of 14 consecutive quarters of double-digit profit growth for the S&P 500 from 2003-2006, investors are now bracing for disappointing earnings reports in the third quarter.

In fact, the S&P 500 is expected to post year-over-year earnings growth of less than 1% for the three months that ended with September. That's down sharply from a forecast of 6% profit growth as recently as July 1st, according to data from Thomson Financial. Ongoing uncertainty about the sick housing sector and its impact on the U.S. economy is to blame here.

If this forecast proves correct, it would be the weakest quarterly profit result for the blue-chip index in more than five years. Certain sectors should still produce good results however, particularly the defensive sectors of the S&P 500, and those that earn much of their profits from booming international sales.

Healthcare and technology for instance, should continue to post double-digit earnings gains. But watch out for financial and consumer stocks, where profits are expected to decline 6% and 7% respectively.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: Mike will be making a guest appearance on CNBC's "Closing Bell" today at 3:45 PM EDT to discuss the impact of 3rd quarter earnings season. Tune in to hear about the best stocks and sectors to own right now!