Germany and the euro

The S&P 500 moved back down for retest of 1,165 support/resistance point yesterday. That important level held, but it’s interesting to see what lead to the retest.  

Basically, yesterday’s decline was the result of currency values. The U.S. dollar rose against the euro as more signs of dissension in the European Union add uncertainty to the future of the euro. 

The root cause of the dissension, the ongoing debt issues in Greece and now in Portugal, is somewhat irrelevant. Greece will get the bailout loans it needs. And whether they come cheaply from the IMF or a bit more expensive from the EU central bank, they will come.   

The overriding issue is that Germany is demanding IMF involvement. Other European countries see this as an internal matter for the EU to solve. From that perspective, we can see the Greek debt solution as a chance for the EU to demonstrate its cohesion.   

And Germany is throwing a monkey wrench into the whole thing.   

Is it so hard to imagine Germany pulling rank and simply exiting the EU if it doesn’t get its way? The odds are probably against, but we have t admit it’s within the realm of possibility.   

And without Germany, the biggest economy in Europe, what then becomes of the EU?   

Yeah, I’d sell euros too, if I were a currency trader.  

So ultimately we have a situation where the U.S. dollar has been the world’s strongest currency. But really, we should probably call it the least weak currency, because it’s only rallying because other currencies are dragged lower by economic weakness.   

(Of course, the one exception here is China. If China’s yuan traded on the open market, it would most likely be stronger than it is now. Eventually, China will have to stop protecting its currency. But since that doesn’t appear imminent, I’m leaving China out of the discussion for now.)   

So today, it appears that the EU will buckle to Germany’s demands and the euro will rally. A euro rally will lead the dollar lower and dollar denominated assets will also rally. 

I’ve said that I think the next stop for the S&P 500 is 1,200. That’s a 3% move. Financials will do well, as will technology. But the biggest percentage move could come from oil stocks.  

It’s clear that oil has become less influenced by strength in the U.S. dollar. That’s because demand is rising and there are limits to how much (and how quickly) production can rise.   

Oil has been trading between $80 and $82 for most of March. The year-to-date high is around $84. I think we are a few days away form new highs for oil. And oil stocks will be among the best performers for this next move higher.    

I just added two domestic oil exploration companies to the Energy World Profits portfolio. And I think each of them is about to put in a 20% move higher, at minimum.   

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