Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

1. Dollar Cheers, Commodities Jeer:  Let’s face it, we are all amazed at the strength in the U.S. dollar. Since December of last year, the dollar index has risen nearly 19%, fueled by the troubled euro, plagued recently by Italian debt (projected 117% of GDP for 2010) concerns, and a faltering U.S. stock market. We will also point out that by holding dollars; one has seen their purchasing power increase against the “basket of goods.”  As compared to the Reuters/Jefferies CRB Index, which has fallen 9.2% in the same period, this would translate to a near 28% (9.2+19) turnaround on dollar value, relatively speaking.

In contrast, gold hasn’t fallen in response, as it has in days gone by. Instead the yellow metal has risen 8%, also since December last year, not as much as the dollar, but still respectable. So far, MWM has held a substantial dollar allocation for volatility, liquidity, and diversity purposes. We have also, to some degree, expected a rally of this type to occur. However, what haunts this position are gold’s continued climb and the U.S.’s solvency issues. At the moment, the world is moving into the dollar simply because it is not the euro and it is not the U.S. stock market, but we see the rally coming to an abrupt halt once it’s clear the economy is contracting, and, by extension, that our debts will not be satisfied.

Action point: MWM may turn to foreign currencies – Canada and Australia are among the stronger options/substitutes for its U.S. dollar positions.

2. What Lies Beneath – U.S. Economic issues: With the economic and financial trouble brewing in Europe (debt) and in Asia (inflation), world stock markets are hovering at their lows (unlike here in the U.S.). In commentaries past, we have questioned U.S. strength to hold, expecting these foreign contagions to reach our shores.

In recent weeks we have seen some evidence of that in our municipalities. Seven U.S. cities recently had their municipal bonds downgraded below investment grade. Their debt is now junk, considered more worthless than that of the so-called PIIGS. Last quarter, Moody’s Investor Services declared the debt issued by Harrisburg, Pennsylvania, and Woonsocket, Rhode Island, to be junk or below-investment-grade. Meanwhile, Fitch Ratings currently has four other cities in the basement – Detroit and Pontiac, Michigan, Harvey, Illinois, and Littlefield, Texas – while Standard and Poor’s has one – Central Falls, Rhode Island. There are also rumblings of deficit issues mounting in New Jersey state and Florida’s Dade County (Miami), not to mention California.

To be clear, our cities and states do not have printing presses. By law, they are supposed to balance their books over time. When they can’t, as in these cases, the U.S. Treasury will be pressured to provide more bailouts of sizable proportions.  Down the road, this will have enormous negative consequences for the fixed income markets and the Economy at large. Stay tuned.

Action point: No action to be taken. We’ve taken measures to capitalize on rising rates (falling bond market) in our aggressive portfolio (M).

Enjoy the weekend.

David Burgess
VP Investment Management

David McAlvany
President and CEO