a failed breakout on the indexes...

Friday was a good signal to begin shorting the equity markets again, atleast for the short term. The monthly jobs numbers came out far better than expected and the market closed flat on the day. For the previous 3-4 months the market has been scoffing at the worse than expected numbers and bidding the market higher. This is a good sign that this dead cat bounce rally has run its course. Now, although I am expecting a sell off in commodities and stocks over the next couple of weeks, I still think that the bulltards still have some umph left in them and there will be another rally attempt that could push the indexes up to the 9500-10000 level on the dow and the 1000 level on the sp500. I currently cannot see any reason for the markets to climb higher than that, unless....

Unless we have a dollar crisis. The dollar has been rallying over the last couple of days and that has been giving us the much needed correction in stocks and commodities, because when the buying power of the dollar becomes worth more, it takes less of them to buy stocks and commodities, but the dollar has appeared to have resumed its multi decade decline versus foriegn currencies. Now an overall longterm weakening currency is not anything to panic about, a dollar crisis is. In a dollar crisis, anybody who was a holder of cash or credit, would as quickly as possible, spend their dollars on whatever they thought was going to be worth something at the end of the day like gold,silver,oil futures, food, guns, bullets, stocks,...YES I said stocks.

Now, I had been pondering the thought of what would happen to the stock market if we were to enter a period of hyper inflation where people were trying to get out of dollars, and I had thought that it was entirely possible for a huge, massive stockmarket bubble to occur in that situation. Now last week, I read an article that the famous investor Jim Rogers was pondering the exact same thing. He said that he would not try to short this stock market for this very reason.

Now this would just further increase the confusion of this entire financial mess. There is so many unknowns about what is going to happen that if you cannot stay focused on these markets than you should probably get as diversified as possible. Here is what I recommend:

*Minimum of 10% of your wealth should be stored in precious metals until this crisis is passed us by. I would pick up Gold around the 900-935 level. I would recommend owning more Gold than that, but there is so much uncertainty in this market as well. In the 30's, the government made it illegal to own Gold. If this were to happen today, it would most certainly create a black market for the shiny metal, which would increase the value of it considerably, but I wouldn't want to be 100% dependent on it. The main goal here with precious metals is to offset the effects of out of control inflation.

*I would get some exposure to the short side U.S. Treasury bonds. There is an etf that is an ultra short 20year Bond. The major sell off in the U.S. Treasury bond market is only in the early stages, and as we saw the massive runups in the ultra short financial etf's during the credit crisis, this etf is sure to make you some nice returns. The symbol here is TBT, I would wait for a pull back here though before I pulled the trigger. I am not familiar with trading the bond market, but I am sure that there is exellent ways to make money there as well on the short side of bonds.

*I would get some exposure to some foriegn currencies, as I have said before, I like the Norwegian Krone and my new favorite is the Australian Dollar. The Krone is backed by the price of oil, and the Australian Dollar is backed by the strength of the mining industry. Whether we plunge into hyper inflation, or we have a normal recovery like others over the past 20years, commodities are poised to perform, so these currencies should perform well in either scenario.

*Stocks- I would have some exposure to stocks. Again, the Federal Reserve is not going to allow us to go through a long bout with deflation, so they are going to continue to ramp up the printing pressed until things start to turn around. Now, it is either going to be a normal recovery, or it is going to be a hyper inflation recovery (which I am strongly leaning towards). In either scenario, there is going to be inflation and the commidity based names are going to be the place to be, and this would include metals and miners, oil and oil services, agricultural, infrastructure, and bulk shipping. There was an opportunity to get into these names at unbelievable prices and I don't think that we will see that opportunity again. So I would wait for a pull back over the next couple of weeks and than I would pick some of these companies up.

I'll give some further thoughts later.

Cash21