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January 4, 2006

Dollar Dilemma

U.S. equity markets got their expected follow-thru from yesterday's Fed-induced frenzy. Knowing that the contents of the meeting minutes would be interpreted bullishly, one has to wonder if Sir Alan had some sort of deliberate design in releasing them on the first trading day of the year. I believe he will do anything within his means to prevent a meltdown before his departure. Having been rather bearish on equity markets for a little over a year now, I had discussed an intriguing possibility with a colleague last spring: that Papa Bear would not return until after Greenspan's departure simply because he wouldn't let it. I haven't put much weight on that theory until now.

For the second day in a row, the US Dollar Index tanked, and it now sits at a new low off the early November peak. This drop is quite ominous, and if Greenspan is indeed playing Santa to equity markets, the dollar may cast itself as the Grinch. Most markets ignored the dollar today. Silver and gold were rather tame, and equities were strong. In general, a dollar decline helps metals and softens equities, but such correlations do not necessarily hold on a day-to-day or even week-to week basis. However, something will have to give eventually. Unless the dollar firms and puts in a sharp reversal, we are likely to see a further spike in metals prices and a serious slough in equities.

A favorite short play of mine, Research in Motion, tacked on a couple bucks today. There was no official news for the company, but rumors continue to circulate about when a settlement will be reached with NTP. RIMM is playing chicken with a tough judge in Virginia, but I believe it is in the company's best interest to delay any settlement. A delay not only gives RIMM a chance to weaken NTP's patent claims, but also supports the stock price while speculators await a settlement rally. The whole situation appears to be a classic case of "buy the rumor, sell the news." One way or the other, I intend to increase my bets on a RIMM decline after resolution of the lawsuit.

The energy sector appears very strong right now. It's impossible to tell whether the current strength is simply beginning-of-year position building or something more fundamental. As I've stated, I believe energy prices will be challenged in the coming year by recessions in both the U.S. and China, but timing such weakness is very difficult. I intend to wait for more data before building any significant positions.

Disclosure: Long RIMM Puts


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