Alexander Green (Investment U):

We all know why the dollar is in the cellar right now. We also know why it’s expected to continue right through to the basement floor:

• Massive budget and trade deficits.
• Ultra-low interest rates. (Zero on the short end.)
• $59 trillion in unfunded liabilities for Social Security, Medicare and Medicaid.
• Bernanke conjuring extra trillions out of thin air to buy Treasuries and mortgage-back securities and patch various holes in the U.S. economy.

There is no reason to believe any of these problems will vanish in the months ahead. Yet the dollar will soar in 2010. Here’s why…

Two Reasons for a Dollar Rebound

There are two main forces that could drive the dollar higher:

• All the problems mentioned above are already well recognized and priced into the greenback.

• Dollar psychology is overwhelmingly bearish. Just as 10 years ago, investors couldn’t imagine Internet stocks doing anything but soaring higher. Five years ago, they couldn’t imagine real estate doing anything but barreling down the same one-way street. Record lows for the dollar are coinciding with enormous confidence that the dollar has nowhere to go but down.

When extreme valuations are accompanied by unbridled optimism or abject pessimism, it virtually always marks a turning point – and an opportunity. This is no exception.

Commentators seem to forget that all currency values are contingent. You can’t just look at fundamentals in the United States. You have to look at them abroad, too.

And there isn’t much out there right now that’s terribly positive…

Click here for the rest of Mr. Green’s analysis at Investment U.

Since I first scraped my knee chasing the neighbor’s cat across the street dozens of years ago, I have been a fan of the get-it-over-fast strategy. Rip the stitches, dry the tears and move on. Dilly-dallying is for sissies and I’m no sissy.

But the nitwits in Washington beg to differ.

After the first round of trillion-dollar stimulus failed to ignite anything but tempers, Congress is hitting us with a slow, but steady stream of economy-boosting spending. They won’t call it a bailout or stimulus, those terms have been politically wasted, but they continue to pour money into the economy like its water on a broiling fire.

They are pulling the Band-Aid off one painful follicle at a time. And I’m getting sick of it.

We’ve got homebuyer incentives. Business loans. Green tax incentives. Car interest deductions. And now more deadbeat homeowners are getting off easy as Obama takes more money from my wallet and gives it to some McMansion owner.

All this hoopla in Dubai proves the point the markets have no clue as to proper valuations. Given just one minor hiccup in the global economy, Wall Street was poised to sell off like never before. The over-leveraged, over-hyped Dubai World comes to the world on Friday and asks for a delay in paying its $60 billion obligations and pundits react like Iran launched “the bomb.”

Come on folks. Dubai’s financial situation is little removed from Donald Trump’s recent woes, including the funky head piece. That much leverage and something will eventually snap.

Even with this notion, the markets were ready to succumb with just one headline.

“Give me just one reason,” you could hear the investors muttering as their nervous finger hovered over the sell button. In the back of their mind, every investor is nervously awaiting the one final catalyst that sends this top-heavy market back where it belongs.

The words “double-dip recession” are on the tip of everyone’s tongue, even Obama’s, but nobody is ready, or politically willing, to call a spade a spade. They’d rather leave the Band-Aid in place for just one more day.

Instead, we are going to sit back, watch unemployment remain over 10% for the next eighteen months and let our government get away with murder. Just like G.W. used 9/11 as a springboard for his defense initiatives, this administration is using a nasty economy as an excuse to move us one mandate away from socialism.

And we are taking it. We are taking it like a herd of cattle take an invitation to a feed lot. This is not a free lunch, folks. Someday soon we’re going to get slaughtered.

*** Investors had better be prepared for what lies ahead. The swift reaction after the news from Dubai proves the markets are uncertain.

Uncertainty creates problems.

If I had to pick just one sector of the economy to be the model of uncertainty, it would be consumer spending. With Black Friday data looking lackluster at best, retailers have little idea what to expect going forward.

Instead of watching the six o’clock news for a hyped up version of the antics at the local mall, I fired up Ole Betsy and drove to a friend’s local shop. What I saw was far different than the frenzied lines at the local Best Buy.

Sure, there were sale signs everywhere, but two customers hardly form a line worth photographing.

When I asked how many of the big sale items were pulled off the shelf, the answer was a big fat goose egg. The big names may draw a crowd, but with razor thin margins they need crowds. To get a scaled-down view, take a look at the little guy.

That scene isn’t pretty.

But there is good news today. Early reports show that Cyber Monday traffic is up by more than 40%. While clicks don’t equal sales, buyers are at least scoping the deals.

That is good news for the online world and is part of the reason shares of Amazon hit new record prices this morning.

Before Jeff Bezos and his troops were celebrating, I was writing a piece for TFN that highlighted a company that will likely be a winner as cash-strapped consumers search out the best deals.

Here is a bit of what I wrote:

“One stock all traders should be aware of on this so-called “Cyber Monday” is ValueVision  Media (NASDAQ:VVTV), the home of ShopNBC.

“As consumers cut back this holiday season, shoppers will diligently search for the best deals. One place they will find them is on the company’s home-shopping network and the ShopNBC web site.

“I have tracked ValueVision for numerous holiday seasons. It is a predictable, cyclical play with the holiday season the catalyst for strong swings in either direction.

“Historically, buyers that got in before the holiday season and got out early in the New Year made sizeable and reliable gains. But predictability kills Wall Street.

“Over the past several years, buyers that got in on December 1 and out on January 1 lost money. That’s because after years of predictable gains, the bandwagon become overloaded.

“But this year I am expecting another turnaround in the trend. We’re back to buy now and sell in January. You won’t get rich from the play (20% upside), but you will find a way to eliminate most market volatility and put weaker consumer spending on your side.

“ValueVision is a small, $107 million company. It has no long-term debt and is poised to rebound to positive cash flow this quarter.

“The real kicker to this stock, however, is its high beta score.” Keep reading here.

*** And now for a new feature this week. Over the past month (it’s been thirty days now since I took the helm), I noticed that Notes readers are incredibly unique. They don’t follow the herd. They think for themselves. And they have interesting insights.

My kind of people. I like it.

That’s why each week, I am going to toss out a “question of the week.” I trust I won’t even have to ask for your thoughts on the subject. Let me have it and we’ll discuss the varying opinions as the week goes by.

This week’s question: Is it a coincidence the weekly political roundtable programs air at the same time churches offer their weekly services?

Looking forward to your thoughts.

We all know it is going to happen, so why bother discussing it. Right?

There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

No more Chicken Little

Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

I can list a couple of dozen stocks that are up by twice that figure today alone.

No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.

The devaluing of the dollar is no surprise. Even a fifth grader can see what’s ahead over the next decade. That’s why there is so little investment potential directly in the currency. Yet, our stubbornness and human greed will not let our eyes focus on anything but taking advantage of the move.

Let that stuff up to the emotional investors.

While they are focusing on gold and the dollar, investments that will provide double-digit returns at best over the next few years, rational investors need to focus on the many other powerful market forces are at work.

The domestic equities market is a wonderful place to be right now, especially if the dollar is collapsing as fast as we believe it to be.

First, anybody exporting goods will see strong top-line growth as the dollar drops. A six percent fall from our currency equals an automatic six percent surge in revenue growth, without the need for any company to do a thing.

Next, if you are a follower of the green-energy craze, you had better be hoping for a weak dollar. The only thing that will ever wean this country from its dangerous addiction to oil is if crude becomes too expensive relative to our alternatives.

With a dollar that is still in demand across the world, dollar-denominated currencies like crude remain fairly inexpensive. But as Uncle Sam’s reserves dwindle in value, crude prices will move inversely. That is good news for all you folks that took Obama’s advice and invested in the “green” sector.

Finally, the markets run on a risk/reward relationship. The higher the risk, the higher the reward. The lower the risk, the lower the reward. Simple stuff.

If we all know the dollar should weaken, where’s the reward potential? But don’t even begin to think there is no risk in the play.

With Washington in charge, especially the current group of legislators, anything is bound to happen. And now that Obama has is political eye set on “saving the dollar,” the road that lies ahead could be very foggy.

My advice? Watch the dollar. Take note of its moves. But invest in anything but the currency. There is better return potential, with much less risk, elsewhere.

For decades, investors valued a company’s shares based on their estimates of the company’s net present value of future earnings. In other words, what is an infinite stream of future earnings worth to us today?

The key to valuations used to be the fact that all businesses are expected to be a “going concern,” meaning they will be around forever. But now, we are valuing stocks based on the assumption that companies may not be here next quarter, let alone next decade.

The action at Citigroup (NYSE:C) is a perfect example. Right now, with shares priced at $3.78, Wall Street is essentially telling us that it calculates the present value of all of Citi’s future earnings at just $21 billion. That figure is roughly the same amount the company earned in 2006, when share price was over $50.

The tide will turn

At today’s price, investors are telling us they believe it will be a long time, if ever, before Citi returns to the same kind of profitability. They are probably right. After this maelstrom of deleveraging, the bank has a long road ahead of it.

But to price this company like it is going out of business is a mistake. It will survive the financial crisis and its position as a “going concern” will become obvious once again.

I have been watching Citi’s action on the options market closely today. Right now, put trading activity outweighs call activity by a 2-to-1 margin, meaning lots of investors are protecting against the downside.

Frankly, I believe the action has more to do with the fact that today is an options expiration day than any fundamental changes in the company’s long-term outlook. Investors are rolling over their options and entering a new front-month contract.

The rapid selling of shares of Citi will soon stop and the frenzy will be over. When it does, anybody that bought shares at today’s ultra-low price will love their move.

Citi’s selling is overdone. Buy shares of the company anywhere below $4.00.

Source: The market’s fundamental error: Buy shares of Citi (NSYE:C)

Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It’s the worst start to a year since the Chicago-based firm began tracking returns in 1990. The $1.9 trillion industry has posted one losing year, in 2002, when funds fell 1.45 percent amid the 23 percent decline by the Standard & Poor’s 500 Index.

With hedge funds producing such losses, investors forked over half as much to fund managers in the first quarter ‘08, $16.5 billion, as they did in the last quarter of ‘07, just over $30 billion.

So, the investment vehicle of the rich is also getting pinched in this global downturn. Though funds that invest based on views of the global economic outlook were able to hit double-digit returns this year. This from the Financial Times:

These so-called macro hedge funds, which attempt to identify extreme valuations in stock markets, interest rates, foreign exchange rates and commodities, have shown returns of more than 12 per cent this year, outperforming the S&P 500 index by about 17 per cen.

To identify extreme price valuations, macro hedge fund managers generally employ a global approach that concentrates on forecasting how global macroeconomic and political events affect the valuations of financial instruments.

Worries about the state of the US and world economy show few signs of easing. A recent survey of more than 70 US hedge fund managers and their advisers has found that most have a broadly pessimistic view on the prospects in 2008 for the country’s economy, which 80 per cent expect to be flat or in recession by the end of the year. Many expect the Federal Reserve to raise interest rates rather than lower them further.

After that column, REITs in general fell 25% in six months. Shares of America’s largest REIT fund manager, Cohen & Steers, were cleaved in half during the drop. After all, if folks don’t want to own REITs, they don’t want to own the guys who own REITs either.

As today’s chart shows, investors are warming back up to the sector. C&S has built a solid “floor” in the $25 area and sits at a six-month high. Rallies come on strong volume, corrections come on weak volume. CB Richard Ellis, the world’s largest real estate services company, sports a similar chart.

We can’t know what the future holds for U.S. commercial real estate. Times could get worse. Times could get better… The renewed strength in Cohen & Steers tells us the forward-looking stock market likes the “times are getting better” thesis.