The supply of dollars is falling as the U.S. current account deficit improves.

Because the major currencies are free-floating, prices are determined in the market based on the global supply and demand for a particular currency against another.

And one of the major sources of supply of U.S. dollars is through the U.S. current account deficit.

Now, the U.S. current account deficit is improving. That means less dollars in global markets, which should help the buck's value.

But here's an interesting side note: The last two times the U.S. current account deficit improved, and dollar liquidity drained from the global economy, there were major stock market crashes and recessions. Will the same thing happen this time around?

Supplies Continue To Dwindle.

With all the money pouring into the commodity markets, you'd think supplies would be ramping up. But nope: Supplies of virtually every natural resource under the sun are dwindling.

Some recent evidence ...

The global platinum market ended 2007 in a deficit of 480,000 ounces, with demand of 7.03 million ounces surpassing supply of 6.55 million ounces.


According to the World Gold Council, in 2007 gold supply decreased 3% to 3,469 metric tonnes. Of that, mine supply decreased 3% to 2,047 metric tonnes.


The International Energy Agency is now (finally) concerned that future crude supplies could be far tighter than previously thought. Previously the agency has predicted that crude supplies will arc to keep pace with rising demand, topping 116 million barrels a day by 2030. But now the group worries that aging oil fields and diminished investment may leave oil companies struggling to produce even 100 million barrels a day for the next two decades.


Copper: New 2008 supply will only feed an additional 2.3% into the market. Furthermore, stockpiles of copper monitored by the LME have dipped by more than a third since the beginning of the year.


Global grain reserves are "precarious" at only 1.7 months of consumption. Wheat inventories, for example, have reached a 30-year low. For rice, global ending stocks finished in December 2007 at 72 million tonnes, an all-time low.

Tip

You see it all the time; a stock jumps 20-30% in just a few days. Suddenly, the average investor sees what is happening and decides to join the bandwagon, hoping to catch some of the move. After jumping in, the stock comes down 15% and the investor is at a loss.

This type of loss is one of the most common mistakes investors make, but is also one of the easiest to avoid. Take a look at the chart below to see what the situation looks like.

Take a chart of Sirius Satellite Radio (SIRI). In 2006, they were on a steady downtrend but rallied to move through their 20 and 50-day moving averages in June. In just 4-5 days, Sirius went up nearly 20%. This was simply too far, too fast and here's why:
The Slow Stochastic and RSI indicators show you how much momentum any given stock has moving up or down. When both of these indicators show extreme conditions (readings above 80 or below 20), they signal a potential reversal of the trend.
In this case, the Slow Stochastic was above 80 and the RSI was near that point as well, meaning the stock was overbought and a reversal should follow. If you followed these indicators, you'd wait to buy stock since you'd know that there was a good chance that the stock would go down in value after you bought.
By using these indicators before you buy a stock, you'll consistently pay less per share and see profits sooner.

Bonds

Consumer prices are climbing at a 4.1 percent clip right now. And investors who believe that number badly underestimates the true rate of inflation (as I do), should be starting to do more selling than buying of bonds. (Don't worry. If you're interested in buying rather than selling, I'll show you how in a moment.)

This is the self-regulating mechanism of the market. As investors sell, the price of bonds goes down - just as selling pressure pushes the price of stocks down.

And as bond prices go down, their yields go up. As yields rise and become more attractive, buyers are once again drawn into the bond market.

Entering the Workforce

An article on CNN.com had these suggestions:

Network with old and new business contacts during your "sabbatical." Then ramp up your efforts when you start job hunting. Set up short meetings with previous employers, customers, co-workers, etc. If you can't get together with them in person, keep in touch by phone and e-mail.

Stay current with new trends and technologies in your industry by attending seminars, reading trade publications, and taking courses.

Work as a volunteer with your favorite organization or intern with a company in your industry. You may not get paid, but this will keep your skills up and give you great networking opportunities. It will also show potential employers you are ready to get back to work.

When you apply for a job, briefly mention in your cover letter why you were out of work for so long. But don't dwell on it. Focus, instead, on your relevant experience and accomplishments.

The Fed is shifting into "neutral."

We've established that long-term rates are not going down due to concerns about inflation. But what about short-term rates, the ones the Fed controls more directly? The news has been better there.

The Fed's cuts in the federal funds rate have helped bring down the London Interbank Offered Rate (LIBOR) and the prime rates quoted by major banks. That has helped lessen the magnitude of rate and payment adjustments for many adjustable rate mortgage holders. It has also lowered the rates on things like home equity lines of credit, which usually track the prime rate.

Expensive Stocks Are Rip-Offs

Many investors swear by the "efficient market theory." All it means is that through the magic of millions of investors buying and selling stock every day, you get what you pay for. If a company is cheap, it's cheap for a reason. If it's expensive, it's expensive for a reason.

I'm a dissenting member of the "efficient market theory" club. First of all, the market runs as much on emotion as it does on logic. And extremes rule. Investors are either too pessimistic or too optimistic.

Instead of the "efficient market theory," I'd call it the "inefficient market theory."

The fact is, you hardly ever get what you pay for when you invest. You usually get too little or too much. These days, when it comes to expensive stocks, you get much too little.

There are 153 companies with a price-to-earnings (P/E) ratio of over 100 (according to a search I did on my Yahoo stock screener). If you're not familiar with P/E ratios, a share price greater than 100 times annual earnings or profits (per share) is very high. To justify such a high price, the company has to grow like the dickens and give every indication of continuing to do so.

I didn't go through all 153 of those companies. But going through about half of them, I found that just a few earned their high P/E ratios because of strong growth. Usually, it was because their earnings fell faster than their price.

A good example: eBay (EBAY). Its earnings dropped 65 percent over the past 12 months. But its price dropped only 8 percent. At a P/E ratio of 98, its price is now much higher compared to its earnings than it was a year ago. The point is, eBay got more expensive by having a bad year, not a good year.

There are rare exceptions to this pattern, and one comes from overseas. Baidu is China's Google. Its P/E ratio is 127. But it also grew its earnings over the past year by 95 percent. Phoenix-based First Solar's (FSLR) P/E ratio is 110. But its earnings grew over 1,000 percent last year.

At one time, you could have argued that Google's ultra-fast growth in revenue and earnings warranted its high P/E ratio. (It was over 100 for a long time but is now at 40.) But very few of the current crop of super-expensive companies can make such a claim. You should avoid them like the plague... unless you know from looking at past earnings that you have a Baidu or a First Solar on your hands.

The Depot Blues...

... struck Wall Street as a disappointing earnings report from Home Depot set a bearish tone for the market.

Certainly not helping matters was the biggest uptick in producer prices since 1991 and oil prices hitting a new all-time high.

All of these things are sure to damper expectations for an upturn in the economy for the second half of the year.

Next ATM Machine

Spend-happy consumers who can no longer use their houses as an ATM machine are simply finding other ATM machines.

From raiding the equity in their houses, they're now raiding their retirement plans. At the end of 2006, only 11 percent of workers had outstanding loans from their retirement plans. At the end of 2007, 18 percent had such loans. As we're approaching Memorial Day weekend, I'm betting it's well over 20 percent.

Why steal from the "future you"?

Banks aren't lending money. So people are forced to go to the only lender who's willing to give them a break - themselves.

The problem with this trend is that the "future you" will probably need the money just as badly as (if not more than) the "present you" - considering the "future you" will be retired and out of a job and trying to live on reduced Social Security benefits.

I beg you to try hard to stay away from your retirement fund. For every $100 you'd be getting from it now, you're taking $150-$200 or more away from yourself 10 years down the road. You need to give your retirement funds as much time as possible to grow.

Confidence

It has been 28 Years since consumer confidence was this low.

The University of Michigan Sentiment survey came in at 59.5, the lowest reading since 1980.

Meanwhile, Treasury Secretary Paulson thinks "the economy will rebound in the second half of the year."

Either consumers are wrong or Mr. Paulson is, we will have to wait to see which it is.

Social Security and the Angry Society

The problem is that just paying higher taxes won't by itself solve the problem because the dirty rotten pols will just steal the increase as they have with what's been done so far.

The SS funds must be separated from the rest of the fed funds and invested somewhat for a higher return, so hopefully it can grow into something real. There is no real trust fund since what's there are just IOUs from one part of the government to another that can only be paid with taxes.

With crimes of this size and importance, someone should go to jail. for a long time. but that's another story. Repairing the faith and security of the system is much more important. But getting the pols to do that will be almost impossible since they all feed off it in the same way.

The American people are being robbed blind and the pols and their finance industry buddies are doing something no outside power could do. destroying the greatest country in the world and all for greed and privilege.

Cola Wars?

Both Pepsi (PEP) and Coca Cola (KO) have been in up trends for the last six years, and have maintained those trends despite the problems with the economy. Even during the bear market of 2000-2002, both outperformed the market.

Another reason to consider these stocks is that both companies have been growing rather than shrinking revenue. In the most recent quarter, PEP and KO reported revenue growth of 13.4 percent and 20.9 percent, respectively. This tells you that Pepsi and Coca Cola are still expanding.

People are creatures of habit. Even when the economy slips a little, there are certain things they will continue to buy - including Coke and Pepsi products.

Strange Recession

Falling confidence, weak dollar, wasting employment, backtracking GDP. many things point to a recession, but it's certainly an odd one.

Productivity is rising, for instance, and is up 3.2% this year. That's not the kind of thing you see in China, but it's a good strong number for the U.S., and in a recession, any gains are unusual.

Even more puzzling, capacity utilization is also high at 80.1%, though that is down a half percent from last month. In short words, factories and businesses are running briskly, using 80% of available space and resources. We never hit 100%. An 85% level would be the equivalent of all hands on deck.

Drill in Alaska Wildlife Preserve

It is true we already do get oil from remote Alaska - Prudhoe Bay accounts for 17% of U.S. domestic production. What's more, since the U.S. produces 5 million barrels of oil a day, if we could pump an additional 1 million barrels from ANWR it would represent a 20% increase in domestic production.

However, even the most hell-bent-for-leather program would require exploration, test wells, building of infrastructure and more. It would probably take about 10 years for oil from ANWR to start reaching consumers. I think we'll either be well on our way to electric cars and trains or a Mad Max-esque dystopia by then. In other words, ANWR isn't a short-term solution to high gasoline prices.

Also, we don't know the size of the recoverable oil reserves in ANWR. Estimates vary, but the mean recoverable estimate is 7.7 billion barrels. That sounds like a lot ... when you're talking about olive oil. The U.S. uses 20.6 million barrels of petroleum per day. So, the recoverable reserves in ANWR would give us 373 days of supply, or slightly over a year.

And it wouldn't be cheap - far from it. ANWR defines "remote," and the winter conditions in ANWR could pretty much be described as "an icy slice of hell."

Finally, there's no guarantee that the oil would go to the U.S. Some Alaskan oil now goes to Japan - oil companies can sell to whoever they want.

Rice

Rice shortages have been plastered all over the news recently and while rice is a crucial staple of the Chinese diet, they also need pork, wheat, soybeans, poultry, edible oils, dairy, and seafood.

A pick for a food takeover is Sadia S.A. (NYSE:SDA), a Brazilian food company that specializes in poultry and pork - two of China's favorite protein sources.

Disconnect

Why the disconnect.Friday was a strange day for the S&P 500 and its derivative products.

The S&P itself was down 0.69 percent while the Spyders were down 0.15 percent and the e-mini futures were down 0.25 percent.

Most times the derivatives will follow the underlying very closely, but because they have separate supply and demand markets, they can have varied performance.

This variance doesn't usually last very long.

The commodity dollars are in turmoil.

The skies above the Canadian dollar are slowly clearing up. Much of the disappointment the U.S. dollar has had to endure has pressured the Canadian dollar too, despite that country's relatively steady economy. But as the buck wiggles free of pressure, so too does the Loonie.

And after shaking loose the Canadian dollar, the Australian and New Zealand dollars have remained attached at the hip for quite some time. Rarely have we seen diverging price action between the two. Earlier in the week, however, was one of those rare examples.

What happened? An Aussie-positive economic report buoyed the Australian dollar. Normally the New Zealand dollar would follow the Aussie. But this time it sunk lower.

What's it mean? Further instances of divergence could indicate traders are growing more selective in their dollar-bashing.

What You Can Learn from All This Action ...

You can no longer just buy any ol' currency and simultaneously sell the dollar. It just isn't working like that anymore. Traders are finally facing up to the currency market imbalances that they previously shied away from.

If you've been jumping in against the dollar with reckless abandon, you may want to think twice about your trading decisions.

If you've slowly and steadily worked yourself away from the perma-bear camp, then I think you're in a good spot. You won't be surprised when this dollar rally lasts.

Fed's Efforts to Save....

...the U.S. Economy and Financial System Succeed ... Credit Crisis Eases.

Under this scenario, the Fed's recent actions of slashing interest rates and pumping money into the economy are successful - the U.S. economy recovers and global growth resumes.

As a result, the credit crunch eases, and money flows through the pipeline. The big commercial and investment banks finally stop taking massive write-downs on bad mortgage securities. Foreclosures shrink, home prices stop hemorrhaging, and home sales pick up. Businesses start hiring and consumers resume spending. Life is good again.

The market decided that no news was good news.

Taking the Dow Jones from 100 points in the red to 50 points in the green.

When you see a big reversal like this, it tends to signal bullish things for the market.

But in the past few weeks, we've seen a few major bullish and bearish reversals. In the end, this market is still trying to find its groove.

But keep your eyes on downside risk since we're still in recession.

Sin May Be a Good Thing

Yes, the economy is in the toilet. Fortunately for you, there are a few easy ways to "recession-proof" your portfolio. For instance, you can invest in so-called "sin" stocks. These include alcohol stocks, tobacco stocks, gambling stocks, etc.

The reason is simple: When times get tough, people still smoke, drink alcohol, and gamble. And some take up smoking, drinking, gambling, etc., as a way to cope. So investing in those stocks can provide stable returns, even under difficult economic conditions.

You still need to be prudent in your investing, and picking industry-leading "sin" companies is a good start. Some investors may exclude these types of investments from a moral standpoint, and that is understandable. But if you're willing to bet on others' bad habits, these stocks can give your portfolio diversity.

Two of my favorites are U.S. Tobacco (UST) and Anheuser Busch (BUD). Both are strong companies with strong brand loyalty that can see them through a bleak economy.

Puts

Just a few days ago, a friend stopped by to say hello and as is often the case when two traders get together, the conversation turned to the market.

It turns out we were both trading the S&P Financial Select SPDR (XLF) put options. (Just a reminder: Puts are instruments that benefit the buyer when the stock, or, in this case, the ETF, drops in value.)

Now the odd thing is that he was selling the XLF puts and I was buying them. He was betting that the XLF would remain above the 20 level. So he was making money by collecting the premiums and letting the puts expire worthless.

I was buying the April 28 puts, which meant that I made money when the XLF fell from $27.50 to $24.50.

Two totally different approaches to trading the XLF puts. But we were both making money.

I prefer buying options to selling options. When you buy an option, the worst that can happen is you'll lose 100 percent of what you paid for it. Meanwhile, your upside is unlimited. When you sell an option, your gain is maximized then and there. But your downside is unlimited. Given the choice, I'd rather maximize the upside and minimize the downside of any trade I make.

That is the name of the game when it comes to trading. There are many ways to trade. There are many ways to make money in the market. The key is to find the type of trading that works best for you.

Overview

The Dow Industrial Average reversal to a primary up-trend has now been confirmed by the S&P 500. Expect a test of the 2007 highs at 14000. While the market is recovering, this is more a function of cheap money than a booming economy - the old maxim still applies: Don't fight the Fed. Milder than expected employment losses may hint at a soft landing, but the housing market collapse and resultant credit squeeze are likely to plague the economy for some time. Banking, housing and other cyclical sectors should be treated with caution.

The FTSE 100 and Nikkei 225 have also confirmed the Dow signal, while Asia-Pacific markets all look promising.

USA

Consumer Spending went up.

At least that's what the market wants us to think. While the headline said consumer spending rose 0.6%, the truth is almost all of that gain was attributed to higher gas and food prices!

In the end, consumer spending only increased 0.1%. Be sure to always dig deep into any government reports to make sure that you fully understand what's happening in the economy.

It's one of the surest ways to make money in the stock market.

Emerging Markets Not Done Yet

This year, the European markets have done just as badly as the U.S. markets. Many have done a lot worse.

Many of these countries have economies that are still expected to grow two or three times faster (or more) than that of the U.S. or Europe. And companies in these countries are also expected to grow earnings much faster than American or European companies. At the same time, their economic and banking systems are becoming more open and transparent and increasingly subject to the rule of law.

Market growth is never smooth. There are bound to be breaks in the climb. We're in one of those breaks now. It shouldn't last. The emerging markets still have a greater upside than those in developed countries. And the iShares MSCI Emerging Markets (EEM) ETF is probably the best way to invest in them.