Jason Kelly

I'm optimistic for a rise in the market.

I wrote last summer that oil would rise higher before falling lower for a while, then continuing another leg higher. That forecast is unfolding.

Lower oil prices are probably not far away. There's no economic reason for oil prices to be this high. Peak oil theorists aside, we're nowhere near the end of oil. Production is actually increasing and is ahead of current demand and projected demand for at least another ten or 15 years.

Some economists say the main reason oil prices are high is that they're denominated in dollars, and the value of the dollar is sinking. Some economists say the opposite is true: the dollar is falling against the euro because oil prices are rising and Middle Eastern nations sell dollars they receive for oil as soon as they receive them.

Either way, there's more to rising oil prices than just a falling dollar. In the past five years, oil prices are up more than three-fold while the dollar has lost less than one-third of its value. Not exactly a hand-in-glove moment that would make O.J. proud.

As with the chicken and the egg, we're not sure whether high oil prices or high euro values come first, but we're sure they come together. What also looks increasingly likely is that both are getting set to reverse course.

As week after week goes by with no economic fallout from the weak dollar, the headline will lose impact. Even now, smart foreigners are taking advantage of lower real estate prices in some parts of the U.S. combined with stronger foreign currencies to buy property at 25% off. That could turn the low dollar into a real estate support asset, which would help the economy, which would help to boost the value of the dollar again.

Another factor shaping up to get the dollar standing tall is the unpegging of Asian currencies from it. India has been letting its rupee rise, South Korea has been letting the won rise, Singapore has hinted at a similar policy, and even China is grumbling about the high price of gas and food and thinking that maybe a rising renminbi would be a quick fix.

If the world goes closer to a free float, the higher return on capital in the U.S. economy should one day get the dollar back on top, or at least closer to the top than the bottom.

Currencies are very complicated, actually, and no matter how much we talk about what influences them, what might happen, what happened in the past, and so on, there may be a much simpler way to get a handle on the odds.

Here it is: think in cycles. Markets tend to move in cycles. The euro weakened against the dollar for the first two years of its existence. Then, for the last seven years it's strengthened. If you know nothing else about why or when, don't you think it looks about time for the worm to turn for a while?

Barron's reported over the weekend that GaveKal, a top research firm, thinks so. It expects that worm to turn down hard, in fact, to where the euro will fetch only $1.05 or $1.10 within two years, down from its current level of nearly $1.50.

So, let's say the dollar strengthens, the price of oil drops, and we get those Fed rate cuts everybody is sure are on the way.

Then, say the consumer keeps on shopping -- as happened over the weekend. That will bring retail profits in higher than expected, because nobody expects much of anything at the moment.

As the above come to pass, financial companies wind down their one-time loss announcements and will have successfully set the stage for rosy backward comparisons in future quarters. How hard is it to do better than losing $11 billion, after all? Not very.

Finally, to cap it all off, GDP keeps coming in positive and recession is officially avoided.

While that may not be a recipe for a rip-roaring stock market, it sure seems like a recipe for a higher one than we have today.

Let's not give up on a rosy medium term just yet.

Labels: Market Timing

Posted by Jason Kelly at 6:38 PM Japan time
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