Better than the Magazine Cover Indicator?

Lately, I've been saying on CNBC's Kudlow & Company and elsewhere that while I believe the long-term outlook for the U.S. dollar is bleak, I am bullish on the currency in the short-to-medium term.

One reason: Too many people seem to think that a bet against the greenback is a sure thing, which is enough to give most contrarians the willies.

Aside from sentiment polls and data from the Commodity Futures Trading Commission that suggest professional speculators are generally leaning the same bearish way, there is evidence (e.g., sizeable inflows into mutual funds that invest in foreign markets) that many small investors are also in this camp.

Then there is the Oct. 11 issue of U.S. News & World Report, which featured a bullish cover story on "Profiting from the Global Boom," with a subtitle arguing that "it's not too late for the long-term investor to look overseas." According to the famous "magazine cover indicator," first devised by Paul McCrae Montgomery, by the time a financial story like this makes it way to the front of a general interest magazine, it often signals that the trend in question is near its end.

So far, to be honest, I've been wrong. The dollar has continued to slip-slide lower in recent weeks, looking like it would be worth less than a sheet of toilet paper in virtually no time at all.

Well, I saw something today that convinced me there may still be hope for a white-haired old contrarian like me.

What was it? According to Bloomberg, "Supermodel Bundchen Joins Hedge Fund Managers Dumping Dollars."

Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar.

Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means.

Even after the dollar lost 34 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further as home sales fall and the Federal Reserve cuts interest rates. The dollar plummeted to its lowest ever last week against the euro, Canadian dollar, Chinese yuan and the cheapest in 26 years against the British pound.

"We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency," said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund. "That should be on top of the list," said Gross, whose firm is a unit of Munich-based insurer Allianz SE.

The dollar fell 0.8 percent last week to $1.4505, the weakest since the euro started trading in 1999. It lost 2.8 percent against the Canadian dollar to 93.51 cents and 1.8 percent versus the pound to $2.09. The Fed's U.S. Trade Weighted Major Currency Dollar index tumbled to 76.3, from 112.89 in January 2004.

Bundchen's Demands

BNP Paribas chief currency strategist Hans-Guenter Redeker, the most accurate foreign-exchange forecaster last quarter in a Bloomberg survey, said the dollar may drop to $1.50 per euro by year-end. The median estimate of 44 strategists surveyed by Bloomberg is for the currency to end the year at $1.43. Among those surveyed last week, the forecast ranges from $1.42 to $1.50.

When Bundchen, 27, signed a contract in August to represent Pantene hair products for Cincinnati-based Procter & Gamble Co., she demanded payment in euros, according to Veja, Brazil's biggest weekly magazine. She'll also get euros for the deal she reached last October with Dolce & Gabbana SpA in Milan to promote the Italian designer's new fragrance, The One, Veja reported. Bundchen earned $33 million in the year through June, Forbes reported in July.

"Contracts starting now are more attractive in euros because we don't know what will happen to the dollar," Patricia Bundchen, the model's twin sister and manager in Brazil, said in a telephone interview in September from Sao Paulo. She declined to discuss details of the arrangements last week, as did Anne Nelson, Bundchen's agent in New York at IMG Models.

Dollar Support

Procter & Gamble's Sao Paulo-based external relations director for Brazil, Andre Quadra, said he couldn't give details of the Pantene contract because of a confidentiality agreement.

Analysts in a Bloomberg survey expect the dollar to strengthen in coming months as stronger-than-forecast reports suggest U.S. consumers will keep the economy out of recession. Payrolls grew by 166,000 in October, double the median forecast of economists in a Bloomberg survey.

The dollar will rise to $1.43 per euro this year and $1.35 by the end of 2008, according to the median estimate in the survey.

"So far the data has shown the U.S. economy may not be slowing to the extent the majority of the market had expected," said Omer Esiner, an analyst at currency-trading company Ruesch International Inc. in Washington who expects the U.S. currency to strengthen to as much as $1.38 per euro. "That could temper policy easing down the road and lend support for the dollar."

`Moving to Asia'

Buffett, whom Forbes in April ranked as the world's third- richest person behind Bill Gates and Carlos Slim, told reporters in South Korea last month that he is bearish on the U.S. currency.

"We still are negative on the dollar relative to most major currencies, so we bought stocks in companies that earn their money in other currencies," Buffett said Oct. 25. Buffett, 77, is chairman of Omaha, Nebraska-based Berkshire Hathaway Inc.

Jim Rogers, a former partner of investor George Soros, said last month he's selling his house and all his possessions in the U.S. currency to buy China's yuan.

"The dollar is collapsing," Rogers said last week in an interview. "I'm moving to Asia because moving to Asia now is like moving to New York in 1907 or London in 1807. It's the wave of the future."

Better Returns

The dollar is falling as investors seek better returns outside the U.S. Developing Asian nations including China and India will grow 9.8 percent this year, compared with 1.9 percent for the U.S., the International Monetary Fund said last month.

China, India and Russia accounted for half the global expansion over the past year, and the euro region will expand 2.5 percent in 2007, outpacing the U.S. for the first time since 2001, the Washington-based IMF estimates.

"The world has learned to live with a weak dollar," said Jay Bryson, a former Fed analyst who is now a global economist in Charlotte, North Carolina, at Wachovia Corp., the fourth- largest U.S. bank. "It's not worried. it doesn't rely on the U.S. as much as it once did."

Bryson forecasts the dollar will weaken to $1.50 per euro by the end of June.

The U.S. currency dropped in the past two months as the Fed cut its target rate for overnight loans between banks twice to keep a decline in home sales from starting a recession. The rate was reduced by three quarters of a percentage point to 4.5 percent, including a quarter-point last week. The National Association of Realtors trade group in Washington said on Oct. 10 that existing home sales may fall 11 percent this year.

Housing Recession

Lower rates have made yields on U.S. debt less attractive. At 3.36 percent, U.S. two-year Treasuries yield 0.26 percentage point less than German government bonds of similar maturity. The last time Treasuries yielded less than bunds was 2004.

The weaker currency has cushioned the U.S. economy during the worst housing recession in 16 years. Gross domestic product grew at an annual rate of 3.9 percent in the third quarter, the most in more than a year, the Commerce Department said Oct. 31 in Washington.

The five-year, 67 percent drop against the Canadian dollar has made it cheaper for fans from Toronto to drive the 110 miles (177 kilometers) to Orchard Park, New York, to watch the Buffalo Bills play football.

Canada Day

Canadians account for 11 percent of the team's season tickets this year, up from 6.5 percent in 2005, according to Scott Berchtold, the Bills' vice president of communications. At yesterday's annual Canada Day game, a record 23 percent of the sellout crowd of 73,967 fans were from Canada, he estimated.

"When the Canadian dollar was down around 65 cents, we didn't get anybody," Ralph Wilson Jr., the team's owner, said in an interview. "When the dollar fell, we starting getting some people." The Canadian dollar bought 61.76 U.S. cents in 2002.

The dollar's drop also makes American goods cheaper abroad. U.S. exports were a record $138.2 billion in August, government data show. Net exports added 0.93 percentage point to U.S. gross domestic product last quarter, offsetting a 1.05 percentage point drag from housing, government data show.

"As long as the dollar's decline doesn't trigger inflation, it's a good thing, helping the U.S. economy to stay out of recession," said Robert Mundell, a professor at Columbia University in New York who won the Nobel Prize for economics in 1999.

Wealthy Clients

The Commerce Department's price index for personal consumption expenditures excluding food and energy rose 1.8 percent in September from a year earlier, the same as in August. The Fed forecasts the index will increase 1.75 percent to 2 percent next year.

Wealthy clients at San Francisco-based Union Bank of California have doubled their deposits in foreign currencies to $60 million the past two months as a hedge against a decline, said Bradley Shairson, head of currency and derivatives at the bank.

U.S. investors bought $198 billion in foreign securities this year through August, 72 percent more than in the same period last year, Treasury Department data show.

That's the same strategy as sovereign wealth funds run by the largest exporters and oil producers, including China, Singapore and Qatar, said Stephen Jen, head of currency research at New York-based Morgan Stanley.

The funds may grow to $17.5 trillion by 2017 from $2.5 trillion now and shift more than $500 billion out of the dollar in the next three years in search of better returns, he said.

"We're all thinking about diversifying out of the dollar," said Jen, who is based in London. "It's a very logical thing."

If they're "all" thinking that way, something tells me we might just see something they didn't think of.

(Hat tip to Ibiza Vagabond.)

Comments

[Harleydog]

Mike

Agree with you on the dollar, lots of people on the the short side of that boat, and we know what happens then.

If memory still serves me, wasn't one Mick Jagger of prestigious LSE fame demanding payment in Yen in the late 80's? Celebrity currency traders, just love em'

Keep well.

[Desert Dan]

Mike

I don't know but it sounds a bit like you are pandering
to that goofy Larry Kudlow; (wanting to appear even-
minded?). I get the contrarian bit; the amazing
American consumer continues to consume, but short to medium term the dollar goes strong? In the meantime, the real estate market is dissolving, home inventories are exploding and it looks liket the oil resource depletion issue is coming into full play.

Thanks,

[Me]

That's ridiculous.
While the dollar may or may not have a short term bounce, it's not because of some stupid magazine cover or supermodel. Would you say the housing mess is over with when it's on the front cover of Time next month? Of course not. It will last years and years regardless of how many people jump on the 'housing bear' boat.

[Edwardo]

Jim Rogers is a first class &$#!!, and while he's probably right about the bearish prospects for the dollar and the U.S. economy, it's a hugely crowded trade right now. I imagine he probably needs to unwind some shorts and is just looking for some suckers to dump his holdings on.

As for China being the New York of '07 or London of a century earlier, Roger's is a fool. The planet is in no condition to sustain anything like a rerun of the salad days of the British and U.S. empires. He's focused on the wrong sort of history repeating, and should instead look to the aftermath of the fall of Rome as a better guide to the times that lie ahead, chaotic and lean. In the meantime, Mr. Rogers, can have his new neighborhood.