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November 14, 2005

Consolidation

Today's action appeared very much like a consolidation within a longer bull run. The major indices were marginally lower, and no individual equities stood out. On the macro side, 10-year Treasuries were off a half point, popping the yield back up to 4.6%, despite a continued, steady rise in the dollar. As we can see in the chart below, the US Dollar has busted its previous 2005 high and is testing the 2004 high. Should it break new ground to the upside, I believe Treasuries may be in for a bit of a bounce.

dollar decline

Gold, however, is not cooperating. Although its rally is pausing as the dollar attempts to break out, the yellow metal is still up 10% since July when the dollar was last seen hanging around these levels. I am watching the metals closely for clues to when the dollar may falter and likewise watching the dollar for clues to when metals may shoot upwards. I have little doubt that both will occur, but I don't know which one will lead.

I recently added a small position in Aberdeen Asia-Pacific Income Fund (FAX) to my holdings. FAX is a closed-end fund holding mostly Australian bonds, though it sprinkles in fixed income from a few other countries, as well. I see it as a way to short the dollar while earning a dividend. It has a 7.3% yield and sells at an 8% discount to NAV at today's price. This issue can be volatile! It's share price has shed 16% from its February high, including an 11% decline since the dollar started its latest rally in September. However, it traded north of $7 in early 2004, and I believe it will reach that level again once the dollar bear returns.

On a closing note, it looks like traders are getting very optimistic about the holiday season. The stocks of retailers like Circuit City, Best Buy, and Wal-Mart have been zooming upwards for the passed two months. It may pay to counter this optimism at some point, but I don't see a trigger point, yet. I'll post new thoughts on this subject in the coming weeks.

Disclosure: Long FAX; Long BBY Puts

 

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