Dow Jones 12194.13 -27.80 2:04 pm PST, December 1, 2006 NASDAQ 2413.21 -18.56 For info, visit access.smallcapnetwork.com S & P 500 1396.71 -3.92 Change your subscription status here Russell 2000 781.17 -4.95 VOLUME 06: ISSUE 95 Dollars & Sense  In my recent routine skimming of financial news headlines, I had one of those 'aha' moments when you consciously realize something you probably sub-consciously realized long ago. I figured it made sense to put our two cents in on the matter as well, since the issue is potentially a money-making/saving matter for our readers.  If you think currency trading and exchange rates are only of interest to FOREX traders, you might want to reconsider. The 'aha' moment I mentioned above was the recognition that I was seeing almost as many U.S. dollar and currency articles on the 'investing' pages as I was articles about companies, stocks, and the overall market.  While I personally feel the media can artificially inflate the importance of some data, I also feel you can't shrug off what the media says or does just because it's irrelevant. If 'the market' collectively thinks the news will impact their stocks (whether it actually will or not), investors are likely to behave accordingly and create something of a short-term self-fulfilling prophecy. Other times the media is exactly right in their analysis....including the long-term impact of a strong or weak dollar. In those cases, staying abreast of trends can potentially make you some money, or save you some money, if not both.  With those concepts in mind, let's just go over some of the key dynamics of the U.S. dollar we think are worth understanding as investors as well as traders. Not all of these ideas will be new to all of you, but we feel it's still a valuable reminder.    First Things First Pros of a Weak Dollar  U.S. companies find it easier to sell goods to overseas markets, since the 'price' to foreign consumers, relatively speaking, is lower for U.S. goods and services. Better still, domestic companies aren't pressured to keep prices low (at least to overseas buyers). So, there's an opportunity for strong corporate earnings for businesses with foreign customers.  Cons of a Weak Dollar  If the dollar is 'weak', U.S. consumers see higher prices on foreign products and services, since their dollars don't go as far overseas. These inflated prices on foreign products cause the domestic cost-of-living to go up. That's the fancy explanation for 'inflation'.  Pros of a Strong Dollar  Inflation is usually kept under control when the dollar is strong, as relatively lower prices on foreign products and services keeps the cost of living (inflation) down. Plus, it's easier for U.S. institutions and individual investors to justify the purchase of foreign stocks and bonds.  Cons of a Strong Dollar  If the dollar is 'strong', U.S. business can't compete in foreign markets without radically dropping prices, as the cost of their products or services is just too lofty for foreign consumers who can find lower prices for goods produced within their own country.  OK, you've got the basics now if you didn't already know them. Up next is the heart of the matter....understanding what affects the dollar, what the dollar affects, and what that means to you as a stock-owner.    What Affects The Dollar's Value There are dozens of reasons exchange rates can fluctuate, but at the end of the day, I see two key intra-related forces working for or against the dollar. One is interest rates, and the other is inflation. Maybe it would be just as fair to say the dollar affects inflation and interest rates, rather than the other way around (the old chicken or the egg argument). And here's where we think we start to justify our effort in bringing you today's edition....  Although currency commentary has become mainstream within the financial repertoire, I couldn't find anybody who would come out and just say what I personally think. That is, I feel those three pieces of the puzzle are trapped in a potential Catch-22, at least as far as investors are concerned. Check it out...  In general, investors (and some economists) view inflation as an impediment on market growth. To combat inflation, the Fed can raise interest rates. When rates rise - even modestly - the valuation of the U.S. dollar rises too. U.S. businesses that rely on exports are apt to see major decreases in foreign demand when the dollar becomes 'expensive', which will hurt their bottom lines.  Now for the sake of argument, let's take a slightly different path. Low interest rates are intended to inspire easy spending, which in turn should (hopefully) spur economic growth. A side effect, though, is a weakened currency. While U.S. exports could increase significantly in such an environment, inflation - to the average U.S. consumer - swells up. To combat that, the Fed can raise rates, but at the expense of stifling economic growth. Once the dollar's value starts to rise, inflation is contained, but U.S. exports decrease again (widening the trade gap), and foreign investors lose interest in buying U.S. assets.  Point being, it seems like you have to rob Peter to pay Paul. While there's a certain attraction to just keeping rates low, that allows inflation, which could potentially crimp the domestic market. A strong dollar would indeed control inflation and therefore interest rates, but it would also keep foreign investors leery of putting any of their much-needed money into dollar-denominated assets - they'd just be too expensive. Plus, a strong dollar widens the trade deficit.    What It Means To You We called it a Catch-22 above, but that's not to imply it's an impossible situation to deal with....it's more like walking a tight rope. The only real tool available to stay balanced is the Fed's interest rates. However, rates change in response to inflation, yet can create pressures on the dollar's value. Simultaneously, the dollar's value is also set by supply and demand from foreign investors' interpretation of the United States' economic strength, inflation, and (ironically) our interest rates relative to other interest rates. So, the 'balance' is difficult to find, especially when all the contributing factors are always changing.  So what's that mean to you? Believe it or not, this isn't supposed to be a lesson in economics. Our concern has always been successful investing. This is what we think is relevant to you as an investor - and maybe even as a trader - right now.  1. The yield curve has been inverted for a while. As the old joke goes, an inverted yield curve has predicted nine of the last six recessions. But, I can't ever recall a time when it missed one. Unless this time is an exception, the currently-inverted yield curve could weigh heavily on the economy, and indirectly on the stock market. If this comes to fruition, in my opinion, you may need to go on the defensive with stocks. For the time being, the Fed seems content with the inverted curve, and whatever consequences may result. On the flip side, never confuse the economy with the market. Some stocks can and do go higher - even during a recession.  2. Since low interest rates are generally linked to weakness in the dollar, I find governmental institutions at odds with each other. Treasury Secretary Henry Paulson recently said "A strong dollar is clearly in our nation's interest". Yet, it seems like Bernanke is generally trying to accommodate the market by only raising rates (and therefore, the dollar's value) on a 'need to' basis. If forced to choose which voice carries more weight, I choose Bernanke....and I think the market does too. Besides, despite Paulson's words, there's not actually a lot he can do (presently) to make the dollar any stronger.  3. We mentioned above that a falling dollar would improve imports and therefore, close the trade deficit gap. However, we've seen the dollar fall and rise several times over the last three decades, and not once have we not had a trade deficit. The dollar has been particularly weakened since 2002, but the deficit has hit four consecutive record highs over the last four years. So, don't confuse theory with fact. A lot of pundits are pounding the table for keeping the dollar weak to close the gap. At this point, I personally have to question whether or not a weaker dollar is the answer. Simultaneously, I have to wonder if it even matters now....it hasn't been a problem since the 70's. And, our creditors don't seem too nervous yet. In the meantime, the market has gone considerably higher for the majority of that time frame. Unless the creditors finally come looking for their principal instead of more interest payments (metaphorically speaking), I don't know that the trade gap is actually going to be a drag on stocks...yet.  And the point of all of this?  For what it's worth, the current scenario is not the expected norm (if there is one). We would generally expect to see the dollar's value move cyclically higher now that inflation as well as interest rates seem to be near there nominal target. The dollar, however, has not moved higher. It's pointed lower again, which suggests inflation and/or interest rates may not actually be in their final cyclical resting spot yet. The lesson we can all learn - and it's a good one - is to never assume what 'should be' happening is happening. I think you're far better off responding to what 'is' happening.  In any case, if the dollar stays weak or gets weaker, the risk of inflation grows. If we have unbridled inflation though, investing seems less attractive - possibly to the point of being undesirable. If the Fed fights any further inflation, they're likely to do it first with more rate hikes (which the market ain't gonna' like). On the other hand, I wonder if a weak dollar may fix the yield curve that the Fed can't seem to fix. The thing is, I have a sneaking suspicion the dollar's chart may actually forecast that before the Fed confirms it.     We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130 Clearly Canadian Breaks Some Technical Resistance Sometimes, it just takes a spark to get a stock going. That's what we think about Clearly Canadian (OTCBB: CCBEF) shares anyway.  On November 10th, we mentioned the possibility of a triple-bottom being made on the CCBEF chart. The $2.10 area was the approximate support zone we were honing in on, as the downtrend at the time looked like it was slowing as the stock fell towards that level. On November 16th, a low of $2.00 was made. As of Wednesday - nine days later - the stock closed at $2.73....a 36.5% gain that broke some key technical barriers along the way.  We think the break past the 20-day and 50-day moving average lines may be even more impressive than the size of the move itself. Why? Because both had been resistance (at some point) since August.  For more, click here.   Challenger Powerboat Places 2nd, CPWB Shares Perking Up Once again, Challenger's (OTCBB: CPWB) powerboats have done extremely well on the racing circuit. Team Gallagher, driving a Challenger DDC-28, took 2nd place at the Key West World Championships held a couple of weeks ago. Congratulations are on order not just for this race, but for a great season. Team Gallagher has been burning up the track, errr...the water all year long.  It's also a victory of sorts for shareholders. Each time a Challenger boat crosses the finish line before the vast majority of the rest of the boats in a race, Challenger gains credibility. Credibility should eventually lead to sales, which in turn will lead to profits. We think Challenger is a prime example of how building a 'best of breed' product is critical to their success, as the performance boating industry is highly competitive. From what we've seen, the DDC-28 (and the DDC-30) seem to be just top-notch. That's why we think good things are finally on store for this company and its shareholders.  For thought's on the chart, click here.   BioCurex Shares Appear to be at Bottom of a Range While we'd be the first to acknowledge owning BioCurex (OTCBB: BOCX) could have led to sea-sickness since July, we'd also be doing a dis-service if we didn't mention we think the stock is at the bottom of a widening range right now. It appears Wednesday's 7 cent rally was spurred by a support line that extends all the way back to July. There was one brief instance where shares traded under this line in August, but overall, we feel this is the line to watch if you're a trader (we think investors may want to pay attention too though, if you're shopping for an optimal entry spot).  As of right now, that support line is at 66 cents and rising. The resistance line is rising too...at a faster rate. Currently at $1.14, there's really no way of telling where it might be if and when it's finally reached again. We'll keep an eye on it though, and let you know how it shapes up.  In the ultra-short-term, we've seen shares top out around 75 cents a few times over the last three weeks. So, we think any potential 'bigger picture' move higher within this rising support and resistance framework is going to first depend on getting past that level.  For chart, click here.  Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the SmallCapDigest Email Newsletter on a regular basis. 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