The Rude Awakening
Wall Street, New York
Thursday, June 8, 2006

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• How to avoid the pitfalls of other, lethargic money
  managers,
  
  
• The flailing dollar, despite its short term rally, is
  in for a tough road ahead,
  
  
• Sorting the green from the green your wallet, how to
  be an inconspicuous tourist 101, all the markets and
  plenty more...

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Joel Bowman, drenched from the New York rain, reports...

"You must be glad to be away from the beach and back in the
New York rain," quipped your junior editor's father,
himself an avid surfer, on the phone last night.

"You would know from your recent, Stateside jaunt that New
York possesses a charm of its own," we rebutted, "albeit a
saltwater-free one."

After more than a year away from my family, I was fortunate
enough to play host/tourist guide to my mother and father
last month. Having traveled a good deal of the globe, my
folks have a relatively high aptitude for remaining
inconspicuous on vacation. Refraining from waiving maps and
cameras around and adorning themselves in "I Heart NY" T-
shirts afforded them a fairly haggle-free experience in the
Big Apple.

I offer the "fairly" caveat because there was one, glaring
giveaway that blew their cover throughout the entire trip:
their handling of American dollars.

One thing you always notice when foreigners (and I feel
qualified to say this as I am one) arrive at the counter is
that they fumble with the notes.  

The fact that we Australians have multicolored, waterproof,
plastic bills of distinctly varying sizes means opening a
wallet stuffed with green bills – especially at the front
of an impatient New York line – can be quite an ordeal.
Needless to say, your magnanimous junior editor was glad to
lend a hand and spend the bulk of their travel money for
them.

Unfortunately, the lack of multicolored flare of the
Greenback is the very least of its problems. Faced with an
increasingly tenuous credit rating and a plethora of
booming emerging markets providing attractive investment
opportunities, there are bigger dilemmas to ponder. 

So it is with a mixture of compunction and heartfelt duty
that we deliver today's Rude. Read on as Dan Denning
reports on the flailing greenback and learn how to protect
your investments...both U.S. and abroad.

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"Why is it that the Asian central bankers continue to
support the dollar, the American economy, and the huge
American structural deficits?" I recently asked Dr. Marc
Faber, editor of The Gloom, Boom and Doom Report. "Don't
they have better places to invest their money, like their
own economies, for example?"

"Of course they do," Dr. Faber replied. "But most central
bankers are idiots. That won't change. But I tell you this;
a grand exit from dollar-denominated assets is already
underway."

A few days later, Faber delivered a similar message to a
packed, but mostly lethargic, roomful of professional money
managers. For many investors, dire warnings about the
imminent demise of the dollar serve merely to garnish a
polite conference lunch of braised lamb and red wine.
Surely, such warnings are not to be taken seriously. But
for some people — let's call them contrarians — the
dollar's decline is a tremendous opportunity.

A currency only retains its value if its issuing government
is not a deadbeat borrower. The U.S. government is not
exactly a deadbeat borrower...at least not yet. (After all,
Moody's and the other two American credit-rating agencies
all agree that the U.S. is a AAA-credit). Even so, a few
investors around the globe are beginning to notice that
America borrows a lot more money each year than it repays.
In other words, it looks like the rest of the world is
catching on that U.S. government bonds, even at higher
yields, might be a lot riskier than America's AAA credit-
rating would imply.

Meanwhile, the shift out of debt-based assets into real
assets is gaining momentum. Want some evidence? Try this:

• Gold and silver are at 20-year highs,
• Oil is back above $70 and,
• Ten-year U.S. Treasury notes are over 5% and 30-year    
  mortgage rates are over 6%. 

What's happening? Those "stupid investors" and central
bankers in Asia are getting smarter. They are buying fewer
U.S. government and mortgage-backed bonds, and investing
more in commodities. Global capital flows are shifting away
from the United States and — for the time being — shifting
into commodity and resource stocks and funds...which brings
me to the Deutsche Bank Commodity Index Tracking Fund
(NYSE: DBC. Recent price: $25.20).

DBC is an exchange-traded fund (ETF) that holds futures
contracts on six highly liquid commodities: light sweet
crude, heating oil, gold, aluminum, corn, and wheat. The
amount invested in each of the six commodity classes (the
weighting) is pre-determined and reset annually as follows:
35% light, sweet crude oil, 20% heating oil, 12.5%
aluminum, 11.25% corn, 11.25% wheat and 10% gold. Thus,
this particular ETF provides a very focused, if somewhat
quirky, play on commodities – both those have suffered
large corrections recently, like crude oil, heating oil and
gold, as well as the agricultural commodities, like corn
and wheat, that have not yet produced big gains during this
commodity bull market. 

DBC, which debuted in early February, isn't the only
commodity ETF, but it may be the most interesting, given
its particular commodity exposure. It holds a smaller
energy weighting (55%), for example, that the Goldman Sachs
Commodity Index, which commits more than 70% of its assets
to energy-related futures. Therefore, as the chart below
illustrates, the Deutsche Bank Commodity Index has been
holding up better than the Goldman Index during the recent
selloff in the energy complex. This divergence would likely
continue if crude oil continues to lag behind the newly
resurgent agricultural sector.

Of course, DBC is not without risk. Perhaps, for example,
we're on the doorstep of a simultaneous crash in all assets
(excepting cash), and commodities will begin to correlate
closely with stocks, bonds, and real estate. There is also
the risk that the hot and fickle money of global capital
markets causes what I call a "flash bubble" in stocks like
DBC. The money rushes in chasing a quick return, and rushes
out just as quickly, ignoring the long-term bullish
commodity trends.

But I would prefer this risk to the risk of investing in
homebuilding stocks or mortgage lenders or any of the other
industry sectors that are just beginning to face serious
difficulties.

The long-term bull market in commodities remains intact,
even if it stumbles from time to time.

[Joel's Note: The demise of the dollar is not necessarily a
harbinger of things to come for your own investments...if
you know how to invest accordingly. For a handful of doomed
dollars you can pick up your own survival guide for the
imminent collapse. Demise of the Dollar – and Why it's Good
for Your Investments had the gusto to knock Harry Potter
off his wizard's perch on Amazon's bestseller's list. To
see what all the fuss is about and protect your investments
read on here:

Demise of the Dollar
http://www.isecureonline.com/Reports/AFP/Dollar/

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