Today; University of Michigan Consumer Confidence dropped to 66 from 70.6. Expectations were for 71, so this was quite a miss. Of course, this should be viewed as a negative to the equity markets, but after a brief decline, the stock market surged higher on low volume.

These days, bad economic data is viewed by the market as a positive because it places a higher probability on continued liquidity pumps and we know that liquidity is all that matters at this time in the markets. Until fundamentals come back into vogue, asset prices will continue to melt up.

We are currently looking at a short squeeze on the US Dollar in the near-term, but continued dollar weakness in the longer term. ‘Quantitative Easing’ won’t end; it will continue globally as ALL foreign central banks seek weaker currencies in order to keep their exports competitive (a weaker currency translates into lower prices for domestic goods on a global basis, thus increasing exports).

Pierre Lassonde calls it competitive devaluation.

If the end result of higher exports is not achieved, the GDP of those nations will drop, leading to higher unemployment at home – of course this is without direct government hiring. This flies in the face of recent Tim Geithner statements about wanting a strong US Dollar…yeah, go for it Teflon Tim!

If the Administration truly wanted a stronger dollar, they wouldn’t be stating that low interest rates will continue for an extended period of time. As we all know, a strong dollar would kill the current expansion.

Today, the Commerce Department reported that the US Trade Deficit rose a whopping +18% in September. So; with the US dollar falling over -15% in the last half year or so, why did the deficit soar? One word; OIL. As the US Dollar falls, the price of oil increases, which increases imports to the US, throwing the trade balance out of whack. Btw, this is US dollar negative in the longer term and should drive all asset prices higher if this trend continues.

All of this is nothing new - same story, different day. The stock market continues to rally on Obama liquidity and short squeezes amidst low volume. We are not sure how long this will last, but please take steps to ensure that you are not the last one holding the bag.

Our current view is that the dollar carry trade has so many traders short the US dollar that the possibility of a massive short squeeze has the potential to push prices of all asset classes lower. If that happens, we will try to be short on the way down giving us an opportunity to purchase stocks and commodities at lower prices.

Of course, not every plan comes to fruition, so we would not be surprised to see this market rise right into the “Santa Claus Rally”. It is easy to “Plan the trade and trade the plan”, but in the end, traders need to trade what they see, not what they think.

Have a great weekend!