Red-Hot Resources

"Luck is not chance, it’s toil; fortune’s expensive smile is earned.”

Thursday, December 07, 2006

Winning A Beauty Contest in a Leper Colony

Yesterday was rough for commodities, as the ADP jobs report fed an overdue dollar rally. Here's what I had to say about the ADP jobs report in a commentary I sent out to the Secret Order of Jurojin...

The dollar bounced like it had springs on its shoes. First, it headed higher on the coat-tails of better-than-expected ISM numbers from yesterday. But the dollar really got its wings thanks to the ADP jobs report. ADP processes about one-in-six private sector paychecks in America, so when it says 158,000 new jobs were created last month -- the largest gain since June – economists and traders sat up and took notice.

So were we wrong on our bearish dollar/bullish gold outlook? Maybe, but not likely. Sure the dollar bounced, but it was way oversold – a reflexive bounce had to happen sooner or later, because nothing travels in a straight line, including currencies. Looking at the charts, this bounce is coming without a technical leg to stand on. And as for fundamentals, well, this is where it gets interesting …

The ADP report is considered by some to be the best single predictor of the government's nonfarm payroll report, but that’s like winning a beauty contest at a leper colony. There are no good predictors of the nonfarm payroll report. And hoo-boy, has the ADP been wrong before.

In June, the ADP forecast private-sector gains of 368,000, while the government report showed just 107,000 new jobs created in the private sector and 27,000 government jobs. Since then, the ADP has been off by an average of 48,000 from the government figures. The much-maligned consensus of economists has been off by an average of 46,000.

What the ADP number does is put a lot of bullishness in the market for both the dollar and Friday’s employment numbers. The market is expecting growth in non-farm payrolls on Friday of 100,000. If those numbers aren’t very good, the dollar could be headed for its next meltdown.

Meanwhile, the Chinese are making noise about shifting funds from Treasuries … The Middle Eastern oil sheiks would rather invest in Asia … and the Fed’s no-rate-cut boat is coming up against the rocky reality of a housing meltdown.

That's what I said yesterday. To clarify: Yes, the US dollar could bounce higher. It was WAY oversold. But the fundamentals for the US dollar are longer-term bearish. So, if the bounce continues for awhile, what will we do? Well, in Red-Hot Asian Tigers and Red-Hot Canadian Small-Caps, we have an eye on the longer term. Most of those positions are in the black anyway, and a correction will just give us a chance to pick up some more shares on the cheap. And have you seen the move in that oil stock I added to Red-Hot Canadian Small-Caps on Tuesday? I've just been waiting for confirmation from tracking (they had computer problems) but WHOO-HOO! That thing is taking off like a rocket.

Now, the jobs number could come in very good on Friday and make me look like an idiot. But again, in the longer-term picture, that won't matter. We can take a few lumps on precious metals and add more when the dollar's rally runs out of steam, which it likely will sooner rather than later. Meanwhile, there are other sectors that will do very well regardless of the dollar's ups or downs, and I'll look more closely at those. The longer-term trend for commodities is up, the longer-term trend for the dollar is down, we'd be fools to ignore that for either RCS or RHAT.

Red-Hot Resources is another story -- in that publication, we play short-term trends in US stocks that are sensitive to natural resources (and by definition, since those resources are priced in dollars, sensitive to the US dollar). So, even though I added a bullish silver position yesterday, you can bet JR and I are looking at this dollar bounce very closely to see if we think it has more legs, and if the bounce is playable.

By the way, if you're wondering what the Secret Order of Jurojin is, it's a non-Weiss publication that I'm involved with (because, as I'm sure you realize, I don't have enough to do, LOL). My partners are some international finance types. My good friend Martin Weiss is not involved with it, nor is it part of Weiss Research. Are we clear on that? Good.

The Secret Order is about the futures market. And all the horror stories you've heard about risk in the futures market are potentially true. So unless you've got big brass ones, definitely don't click


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