1) My Take on the Euro. Entering 2011 as the currency that everyone loved to hate, the Euro has staged a dramatic comeback, much to the chagrin of hedge fund managers and traders alike. Since January, the troubled currency has rallied ten cents from $1.28 to $1.38. Is this the beginning of something big? Or has it shot its wad and headed for a spill?

I vote for the later. The euro is essentially winning the best deck chair on the Titanic contest, the fastest horse at the glue factory, and the prettiest girl at the ugly ball. It's really all about interest rate differentials. At the end of last year, the US economy was growing gangbusters, while Europe was in intensive care. That sent medium and long term American interest rates skyward, while those in Europe languished.

Now the tables have turned. High oil prices are starting to act as a drag on the US, causing economists to rapidly pare back forecasts. Treasury bonds have come back from the dead, bringing the yield on the ten year from 4.70% down to 4.4%. In the meantime, European Central Bank officials have been jawboning the Euro up, threatening interest rate hikes to deal with imagined inflation, no matter that such a policy would be insane to pursue. Hence, we are seeing Euro strength and dollar weakness.

There is another wrinkle to the Euro story here. You would think that high oil prices would be Euro negative, as the continent is a massive importer from that troubled part of the world. But what do Arabs do with the dollars they get for this oil? They buy Euros in order to keep their reserves in a diversified spread. That is why the lurch in crude to $112 in Europe was accompanied by the Euro move to $1.38. This is why the traditional flight to safety bid for the dollar failed to show this time, as it has in all previous oil crises. Some of this spill over buying also explains why the Japanese yen has recently been strong, holding on to the ?81 handle, despite its dismal fundamentals.

How does this party end? US stocks rally once again, US bonds tank, and oil takes a rest, falling well back into the nineties. That could then take the Euro back down to the bottom of its ten dent trading range. A put on the Euro has become a de facto call on US stocks. That's when we test the lower end of the European currency's recent trading range.

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This Party Will Not End Well for the Euro

(SPECIAL $100 OIL ISSUE)

Featured Trades: (MY VICTORY LAP ON OIL)

 

2) My Victory Lap on Oil. One of the boldest predictions that I made in my January 6 asset class forecast for 2011 was that oil would soon hit $100/barrel (click here for the link). My precise words were 'Probably $30 of the current $90 price reflects monetary demand, on top of $60 worth of actual demand from consumers. That will help it grind to $100 sometime in early 2010, and we could spike as high as $120.'

OK, I got the 'grind' part wrong. As it turns out, we have rocketed $18 in a week to a high of $103.40. Brent is up $28 this year. When I made this prediction,? I received tanker fulls of abuse, citing the glut of crude in storage at Cushing, Oklahoma, a slow US economic growth rate, a full strategic petroleum reserve, rapidly progressing conservation measures, and the threat posed by a newly discovered domestic 100 year supply of natural gas. In any case, alternative green energy sources will soon be replacing oil.

Well, there is only two days' worth of supply at Cushing, and they're full because the Canadian tar sands companies have been bringing new supplies on stream. The economy grew at a 4% rate, rather than the 2% many thought. Natural gas is nice, but it will take ten years of infrastructure building and deregulation before it starts to compete with oil. I can assure you that not a drop of SPR is coming on to the market. And alternatives are not going to be making a dent in our energy mix any time soon.

What is my just reward for this call? With gasoline well on its way to $5/gallon, my all-electric Nissan Leaf is looking pretty good, even if delivery has now been pushed back to May.

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Featured Trades: (HOW FAR WILL THE MARKETS FALL?), (VIX), (SPX), (SPY)

 

2) How Far Will the Market Fall? Now that we are solidly in 'RISK OFF' mode, traders, managers, and investors are asking how much downside we are looking at. It is safe to say that those who were piling on longs with reckless abandon are now potentially staring into the depths of a great chasm. I have included charts below showing the important Fibonacci support levels. Let's take a look at how far down is down.

*1,300 '? The first big figure. Already broken intraday, but it held the first time.

*1,286 '? The 50 day moving average, the no brainer, most bullish target. The 'buy the dip' crowd takes a first bite here.

*1,280 '? 38.2% Fibonacci support level.

*1,260 '? 50% Fibonacci support level.

*1,230 '? Broken resistance from the November high. Europe blows up again. Take your pick: Spain, Ireland, Britain, Portugal'?

*1,167 '? The 200 day moving average. It must hold for the bull market to stay intact. This is where $5/gallon takes us. Double dip recession talk reemerges. The 'buy the dip' crowd takes a second bite.

*1,117 '? The November low. The 'buy the dip' crowd throws up on its shoes and pukes out the last two 'buys'. We spike down, triggering another 'flash crash.'

*1,000 '? The next really big figure. Ben Bernanke, with the greatest reluctance, announces QE3. Bond prices soar, taking ten year yields to 2%. Homes prices collapse again, triggering a secondary banking crisis.

*666 '? The Saudi regime falls, and 12 million barrels a day disappears from the market for the indefinite future. Unemployment hits 15%. Obama is toast. Your broker turns bearish and tells you to sell everything. Welcome to the Great Depression II. It starts raining frogs.

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But Will He Bounce?

Featured Trades: (BUY THE DIP IN THE AGS), (DBA), (CORN), (MOS), (POT), (AGU), (ANDE), (CPO)

 

3) A Buying Opportunity is Setting Up for the Ags. In January, I wimped out of my hefty long position in the grain ETF (JJG), hoping to sidestep a potential sell off going into a dreaded US Department of Agriculture crop report, which last year triggered limit down moves. The report turned out to be benign, and I ended up sidestepping an 18% pop in the security.

It is now six weeks later, and we have our limit down moves across the entire ag space. But this time it is a global '?RISK OFF' trade triggered by the calamitous events in Libya. I just received word that a close friend working there for an oil major was safely airlifted to Malta, while another reader emails me that Khadafi is dynamiting pipelines to prevent them falling into the hands of rebels. A declaration of 'force majeure' does little to calm investors. Given that the ags have been among the best performers this year, it only makes sense that a flight to safety delivers to them the worst drubbing.

If you are still holding your position in this space, don't sweat too many bullets. This is but a kink in an upward trajectory that has possibly another two years to run. The world is still making people faster than the food to feed them. Almost every major supplier around the world is facing disruption. Supplies are at multi decade lows. A hungrier, more calorie addicted middle class is still burgeoning in emerging markets. Did I mention the threat to the food supply by global warming and melting glaciers? Food driven inflation isn't going away anytime soon.

If you have any doubts, take a look at the chart below of the percentage of annual income spent on food by country. It starts with a low of 7% for Americans, and goes hyperbolic to 75% for several African countries. When you already spend 75% of your income on food, the only way to cope with a further 50% price increase is to eat less. Not easy when you are surviving on 1,000 calories a day. Expect higher prices, political instability, hoarding, and mass suffering to result.

I have been a huge bull on the ag space since I put out my watershed piece last June, a call that turned out to be immensely profitable for everyone who participated (click here for 'Going Back Into the Ags'). Use the current distress to add to your ag positions, or pick them up if you have not already done so. Look at my favorites in the space the ag ETF (DBA), the corn ETF (CORN), and equities Mosaic (MOS), Potash (POT), and Agrium (AGU). When I see a short term bottom, I'll try to shoot out a trade alert, if I am clever enough to spot it.

You might also add a couple of new names, like Andersons, Inc.? (ANDE), which is involved in crop storage and fertilizer. Also visit and Corn Products International (CPO), which is benefiting from consumer flight from record high sugar prices towards cheaper high fructose corn syrup.

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Here's Where I Want to Buy the Dip

 

Featured Trades: (MORGAN STANLEY), (MS)

 

1) Reflections on Morgan Stanley's 75^th Anniversary. The three elder statesmen I saw on TV ringing the opening bell at the NYSE couldn't have been more representative of the evolution of Morgan Stanley (MS) over the past three quarters of a century. When I joined just after the 35^th anniversary, it was a small, white shoe private partnership with a lock on the cream of investment banking clients like IBM, AT & T, and General Motors.

A great nephew of the original JP Morgan still worked there, was his spitting image, and was trotted out to impress admiring clients. Neatly framed on the wall in the chairman's office was US Steel (X) share certificate No.1, signed by Andrew Carnegie himself, which the firm's antecedents midwifed into existence. One of the first deals I worked on was the breaking up of Ma Bell into the baby bells.

Parker Gilbert was chairman, the son of one of a handful of men who rebuilt the firm from the wreckage of the Great Crash and the passage of the Glass Steagle Act. I knew him well as one of the blue bloods who ran the firm, a genteel, polished, Ivy Leaguer, who exuded fine breeding and confidence. I once spent an afternoon with him in the back of a Daimler limousine driving around London, shopping for thousands of dollars' worth of high end fishing gear, so he could accept an invitation to a Scottish private estate perfectly appointed. If Parker hadn't landed the top job at MS, he probably would have been running another exclusive gentleman's club, like the Jockey Club or the New York Yacht Club.

John Mack was one of a new generation of brash, street fighting, in your face, bare knuckled traders who forced the firm, kicking and screaming all the way, to make a fortune in proprietary trading. Mack, known internally as 'Mack the Knife', was of Lebanese origin, and could not have been more at odds with Morgan Stanley's elitist origins. He once lured a star trader away from Solomon Brothers, and then fired him on the first day. The few female employees we had then cried in his mercurial presence. But there is no doubt that the profits Mack reeled in saved the firm from a takeover down the road, rescuing it from the fate of Solomon Brothers, Kidder Peabody, Dillon Read, and Drexel Burnham, assuring its place in the big league today.

I was one of the few who bridged the two generations, comfortable from my journalism days with moving in Olympian circles, but coming from humble, rural origins. We took the 1987 crash in stride, but during the dark days of the financial crisis, when the share price plunged below $6, it seemed the firm was out for the count. Mack saved the firm a second time, successfully demanding a huge equity infusion from the Mitsubishi Group in Japan (great move, John!), while simultaneously holding at bay the wolves from Wall Street and Washington. What better year to have a junkyard dog as CEO than 2008?

James Gorman joined well after I left, and appears to be a modern day 'suit'. A professional and talented manager to be sure, but lacking the flash, the panache, and the balls of earlier generations. He is symbolic of the class of professional administrators who have been brought on board to run what has essentially become a gigantic utility.

I have seen MS grow from 1,000 to 60,000 employees. The dividend today is more than the total market capitalization of the company back then. Parker summed it up all nicely when he said his 'mind was blown' by the present size of the firm and how far it has gone. I have no doubt Morgan Stanley will be around for another 75 years. And if you believe in the continued existence of Wall Street, as I do, as I do, this would be a great stock to own for your grandkids' 529 educational investment plans.

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