THE DOLLAR IS GETTING FLUSHED DOWN THE TOILET

The topic of the week in the precious metals market: "What's driving gold and silver prices higher and higher? Should I sell and take profits?"

Today's chart is the driving force behind the hot topic. It's the past 12 months of trading in the U.S. dollar.

Last week, Ben Bernanke told America he's ready to do anything in his power to keep the U.S. economy inching along. This means he'll do anything to support asset prices like stocks and housing… even print up fresh money.

The market is reacting to Ben's idea by flushing the dollar. As you can see from today's chart, the dollar has been clobbered to its lowest low in more than seven months. Real "hard money" assets like gold and silver are soaring to their highest levels in decades as a result.

That covers the first part of our topic. And the second? Sure… gold and silver are overbought in the short term. They're due for a "relief" correction. But our view is, take a page from China's playbook and use any weakness in the precious metals to buy more.

The U.S. takes another step towards an all-out trade war with China

Legislation pressing China to raise the value of its currency is set for a vote in the U.S. House next week, as Republicans joined Democrats in expressing frustration that the yuan is appreciating too slowly.

"We cannot wait any longer to level the playing field for U.S. businesses and protect American manufacturing jobs," Democratic Leader Steny Hoyer of Maryland said yesterday after the Ways and Means Committee sent the bill to the full House.

The committee adopted the measure by voice vote after the panel's top Republican, Dave Camp of Michigan, voted with Democrats to back the bill. The full House will vote Sept. 29, said committee Chairman Sander Levin of Michigan, a Democrat.

The measure would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency. President Barack Obama's administration hasn't taken a position on the bill, said Natalie Wyeth, a Treasury Department spokeswoman. A Chinese central bank press official, who prefers not to be identified in accordance with the agency's rule, declined to comment in Beijing today.

The U.S. trade deficit with China widened to $145 billion in the first seven months of this year, from $123 billion for the same period in 2009. The expanding deficit, unemployment lingering at almost 10 percent and polls showing Democrats' seats at risk heading into the election added support for the bill, which has been discussed since 2005.

Flexible Rate

The yuan has strengthened about 2 percent against the dollar since June 19, when China's central bank said it would pursue a more flexible exchange rate. That rate of gain is "inadequate," Treasury Secretary Timothy F. Geithner told the panel last week. Pressure from lawmakers is helping the administration make the case to China to raise the value of the yuan, he said.

Lawmakers such as Camp say they are also frustrated with barriers China has raised to American imports and the piracy of copyrighted American movies, music, and software.

The currency dispute "is a proxy for the state of the overall U.S.-China commercial relationship," William Reinsch, president of the Washington-based National Foreign Trade Council, said Sept. 23 on Bloomberg Television. "I don't think it will have that big of an impact on the American economy."

China Operations

Lawmakers fended off warnings from lobbyists representing companies such as Caterpillar Inc., Wal-Mart Stores Inc., and Citigroup Inc., who said the measure may lead to retaliation against U.S. companies operating in China and curb exports to the country. China may retaliate if the House passes the legislation, said Reinsch, who represents multinational companies such as Caterpillar.

"This could damage our efforts to 'sell American' and compete successfully in the growing China market," Representative Kevin Brady, a Texas Republican who heads the Ways and Means Committee trade panel, said before the vote.

Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China's currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.

Obama Meeting

Obama pressed China's Premier Wen Jiabao in a two-hour meeting at the United Nations Sept. 23 to increase the yuan's value. Wen said this week that a 20 percent increase in the currency would cause severe job losses and trigger social instability in China.

"We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs," he said in New York on Sept. 22.

"We want to see that any legislation is consistent with our international obligations and consistent with the World Trade Organization and is in our interests," Jeff Bader, Obama's director for Asian affairs, said Sept. 23. He didn't say if this bill meets those tests.

Levin said yesterday the measure was redrawn to be consistent with WTO rules. It would let U.S. makers of products petition the Commerce Department for countervailing duties on Chinese products to compensate for the "subsidy" of a weak currency, according to documents released by the committee.

WTO Rules

The Commerce Department rejected such an argument in cases filed by paper and aluminum makers last month, saying that a weak currency isn't a subsidy to a specific industry, as required under WTO rules. The legislation when introduced by Representative Tim Ryan, an Ohio Democrat, would have required that the Commerce Department find that a weak currency is a subsidy. Revisions crafted by Levin removed that language and instead set out provisions intended to make such a finding more likely.

It's that change that won Camp's backing. "It does not presuppose an outcome," he said.

Forty-four Republicans had already signed on as sponsors of the original bill, and with Camp's support, lobbyists said they expect additional Republicans to vote with Democrats next week. That could help spur the Senate to take it up before lawmakers leave Washington to campaign for election, said Lloyd Wood, spokesman for the group of unions and manufacturers fighting for the bill.

"The bigger the vote in the House, the more pressure it puts on the Senate," Wood said.

Lobbyists for groups representing Wal-Mart and Citigroup faulted the panel for approving the measure.

"Provoking tension with our trading partners doesn't come without costs, and we should choose our battles carefully," Stephanie Lester, vice president of the Retail Industry Leaders Association, which represents Wal-Mart, said in a statement. "It makes little sense to enact harmful policies that will spark a bilateral conflict over currency with one of our largest trading partners and fastest growing markets for American exports."

A BIG NEW DEVELOPMENT FOR THE S&P 500

The message from today's chart is, "We're back in bull mode."

Longtime DailyWealth readers know we check in from time to time with the S&P 500's 200-day moving average to gauge which way the "tide" is flowing for the stock market. A moving average is an indicator that computes the average price of an index over a given time period… In this case, it's the blue line overlaid on the chart below.

There's nothing magical about the 200-day moving average. It's simply the most widely used "marking point" traders use to say if a market is in a bull trend or a bear trend. It's popular because it's popular.

As you can see from today's chart, the S&P spent much of 2009 and 2010 above the 200-day moving average. It then dipped below the average in May and has muddled along ever since. The big rally of the past few weeks, however, has taken the S&P above the average… and back into a bullish trend. Folks are taking Ben Bernanke at his word when he says he'll do anything to support asset prices.

AN OLD FRIEND FROM CHINA PAYS A VISIT

Today, we offer up one more "China confounds the skeptics" chart – one near and dear to our hearts. The chart displays the past five years of trading in one of China's largest airline companies, China Southern Airlines (ZNH).

The Chinese stock market is one of our favorite markets to trade. Since China is the world's greatest growth story, it attracts an enormous amount of speculative trading capital. This makes stocks there boom and bust like crazy. You can ride 'em up, and you can ride 'em down.

In mid-2007, China stocks were in the middle of a historic boom. When this boom turned to bust, we picked on China Southern as a stock that would get crushed. The stock went on to fall from $35 per share to just $6 per share as our prediction came true.

But as we've recently noted, high-profile "China plays" are surging right now… including our old friend China Southern. The stock is up 62% this year and sits at a 52-week high. We're sure this big boom will end brutally – just as the one in 2007 did. But for now, it's "game on" in Chinese stocks.

AMAZING PRICE STRENGTH FROM A BIG "CHINA PLAY

Everywhere we look these days, we see pictures of how China is confounding the skeptics…

Like most assets, Chinese stocks enjoyed a huge rally off their panic lows of late 2008 and early 2009. China's benchmark stock index nearly doubled in just six months. Then, the overbought market began drawing big-name skeptics – like legendary trader James Chanos – who think China is a huge bubble ready to burst.

Most Chinese stocks did correct early this year… but have since displayed impressive price strength to resume their bull trends. For example, consider New Oriental Education (EDU)…

New Oriental is the largest private education company in China. The bullish case says, as China grows wealthier, it's going to pay up for more educational services. This makes EDU one of the highest-profile "China plays" on the market. As you can see from today's chart, the bull case is intact and the stock is soaring to new highs.

You can be a China skeptic all you like. But make sure to "mind the market." Right now, it's voting the China story higher and higher.

WHILE U.S. STOCKS STRUGGLE, THAI STOCKS SOAR

Today's message from the market: It's a bull market in Thailand.

Thailand is a small country to the south of China, rich in resources and tourist destinations. It is just one of a handful of countries that Europeans never conquered.

We're solid Thailand traders at DailyWealth. Back in 2008, Tom Dyson and I met with Thailand's brilliant pro-market minister of finance, Korn Chatikavanij in the Parliament House of Thailand. And Steve recommended the thinly traded Thai Fund (TTF) to listeners of our exclusive Off the Record conference call service just months ago. As you can see from today's chart, the fund has soared since then… up 35%.

The story behind the Thailand rally comes down to a huge trend we've been highlighting for several years: the trend of the "work hard, save money" Asian economies growing in prosperity while the "vote for handouts and taxes, pile up debt" economies of Europe and the U.S. muddle along. This is the most important economic trend in the world… and will remain so for decades.

THERE ARE NO BARGAINS IN GOLD THIS YEAR

This week's chart is a picture that has frustrated lots of gold bargain hunters. It shows the past year's trading in gold.

Gold is one of the world's most volatile assets. It is impossible to accurately value. You can't say "I'll pay 10 times earnings" for gold like you would with a stock. You can't say "I'll pay eight times annual rent" like you would with a property. Gold tends to trade on wild swings in investor fear.

That's why many seasoned investors expected gold to endure a substantial correction after its massive 2009 rally… or after its similar rally this year. They expected to add to their gold holdings well off the short-term high… at short-term bargain prices.

But as you can see from this week's chart, there's no gold bargains to be had this year. Gold is not suffering natural selloffs after rallies. Instead, small price declines now trigger huge buying interest from Asia, the Middle East, and giant institutional investors… folks who want to diversify assets out of paper and into "real money." For those looking to buy more gold, we say, don't worry much about the current price… just keep accumulating ounces.

Jim Rogers: Interest rates are dangerously low

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.

"Everyone should be raising interest rates, they are too low worldwide," Rogers said in a phone interview from Singapore. "If the world economy gets better, that's good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money."

China's central bank hasn't increased rates since November 2007. In the U.S., the Federal Reserve this month left the overnight interbank lending rate target in a range of zero to 0.25 percent, where it's been since December 2008, while the European Central Bank has kept its key interest rate at a record low of 1 percent.

Policy makers in Malaysia, South Korea, Taiwan, and Thailand have increased the cost of borrowing at least once this year, while India has boosted rates four times in five months.

The global economy is at the risk of prolonging a recession after reports over the past two days showed U.S. home sales plunged by a record and Japan's export growth slowed for a fifth month in July, he said.

"We never got out of the first recession," Rogers said. "If the U.S. and Europe continue to slow down, that's going to affect everyone. The Chinese economy is 1/10 of the U.S. and Europe and India is a quarter of China, they can't bail us out."

Rogers, who predicted the start of the global commodities rally in 1999, said he was short emerging markets and stocks and long on commodities.

"Commodities will go above their old high sometime in the next decade even if they only grow 5 to 6 percent annually," said Rogers, who is a consultant for the Dalian Commodity Exchange.

Rogers said he would resume buying China's stocks if they were to tumble as they did during the aftermath of the global financial crisis in 2008, when they plunged 65 percent. "I haven't bought since the fall of 2008," he said. "It it were to happen again, I hope that I'm smart enough to buy again."

China could force the world to give up oil

Today, China uses 10% of the world's oil. Its neighbor, South Korea, uses just 3%. If China were to use as much oil per person as South Korea - which figures show could happen quickly - it would eat up over 70% of the world's supply.

Global oil output has increased by just 1% a year since 1975, so there's little chance that these demands could be met through conventional means. If China continues its rapid growth, the world could be forced to find alternative sources of energy sooner than anyone expects.

AN EXTREME LESSON IN SUCCESSFUL TRADING

As we look around the commodity market this week, we're reminded again why it pays the trader to be a "connoisseur of extremes."

Longtime readers know we're always on the hunt for assets in an "extreme" condition. For example, in December 2008, we wrote a bullish note on crude oil, pointing out the extreme reading in the oil/gold ratio.

Gold and oil tend to respond similarly to economic conditions, but the price between the two occasionally gets extremely out of whack. Thanks to worries about a Great Depression Part II back in 2008, oil sold off heavily. This made it incredibly cheap versus gold.

Oil went on to nearly double in price in the next few months… and turned our recommendation of oil-service stocks into a big winner. But as you can see from today's two-year chart, that oil rally stalled out in the $70-$85-per-barrel range… and the fuel is now struggling below its 200-day moving average, a widely used gauge of whether an asset is in a bull trend or bear trend.

Here's the moral of this story: When you're looking for trading ideas, stick with assets in "extreme" conditions… like extremely oversold and cheap, or extremely overbought and expensive. As this example shows, big gains accumulate in a hurry when things get "less extreme" for a given asset. After that, it's a hard dollar…

THE GOLD STOCK DIVERGENCE CONTINUES

Our chart of the week shows the "gold stock divergence" we highlighted months ago is still in place.

For much of 2010, gold stocks and the broad market increased at roughly the same pace. Then, when the market stumbled in April, the two diverged. The broad market kept falling. But gold stocks remained solid, supported by the incredible strength in gold.

As you can see from the "performance chart" below, this divergence is still in place. Gold stocks (the black line), are showing positive returns and climbing. The S&P 500 (the blue line) is showing negative returns and falling.

Gold stocks are typically viewed as a riskier asset… so it's incredibly bullish action for them to remain so steady in the face of terrible stock market weakness. Stay long "the golds."

HOW CHINA GUARANTEED THE PRICE OF GOLD

Almost a year ago, we introduced a unique "worth pondering" idea for gold investors… the idea that China was guaranteeing your gains in gold investments.

Around this time, the Chinese government was in the headlines for encouraging its citizens to buy physical gold and silver. China has trillions of dollars of currency reserves… A tiny portion of this could be directed to supporting the gold price to ensure the government's "buy gold" recommendation was a good one. We called this situation a "whopper of a backstop" for gold.

Looking at the recent action in gold leaves us more and more convinced that Asian buying, led by China, has created a huge floor of support for the oldest form of "real wealth."

You see, gold typically goes through major corrections after extreme moves up, like those staged in late 2009 and early 2010. But as you can see from today's chart, gold is refusing to decline much after these recent rallies. Declines are now weak… and are met with a surge of buying interest. Much of that is coming from your "gold sponsors" in China.

Make 10 Times Your Money without Taking Big Risks

Investing is like tennis. It's a loser's game.

Think of the difference between professional and amateur tennis players. Professionals win points. Amateurs lose them. When weekend warriors play tennis, the losers determine who wins. They hit the ball into the net. They whack it out of bounds. And they routinely double-fault on their serves. That doesn't happen nearly as much in pro tennis, with its long rallies and pinpoint shots.

Most investors are like amateur tennis players. They lose money in stocks because of their own behavior. There's no opponent outplaying them. They beat themselves.

DALBAR, a Boston-based research firm, compared the returns from market index funds with returns real investors earned in equity mutual funds…

From 1989 to 2009, market index funds returned 8.3% per year. If you compound $10,000 at that rate for 20 years, you'll wind up with just under $50,000 – five times your money. For buying an index fund and doing nothing else, that's a great return. No research necessary. No thinking required. Just buy and wait. It couldn't be easier, and you get five times your money, pretax.

The only problem with that 20-year, five-times-your-money return is that almost nobody earned it.

Real, flesh-and-blood investors investing their own real, hard-earned money made significantly less than 8.3% per year over that time. On average, individual investors in U.S. equity funds earned just 3.3% per year. At that rate, $10,000 grew to just $19,150 in 20 years. They didn't even double their money – in 20 years! Most investors just can't hit the ball back over the net.

Most real investors investing their own real money perform even worse relative to the overall market in bull markets. During the great bull market to end all bull markets from 1984 to 2000, DALBAR found equity mutual fund investors made 2.57% per year, with market index funds compounding at 12.22% per year.

The age of the daytrader treated investors worse than most periods. Investors ran around the court faster than ever, swinging like mad, only to hit more balls out of bounds and into the net than ever, turning a $10,000 investment into just $15,000 during the biggest bull market in history. Had they simply failed to lose, they'd have turned $10,000 into just over $100,000.

Investors could have made 10 times their money in 16 years by refusing to overmanage their own money – by letting stocks do the work for them.

A large dose of humility would help most investors make more money in stocks. For starters, most investors just shouldn't buy individual stocks. They should buy index funds and plan to hold for decades. Almost everyone else should build a diversified portfolio of only the highest-quality names and plan to hold them for at least 10 years.

If you can't hold on for a long time, be prepared to take losses.

In my Extreme Value newsletter, I have a list of the world's best companies that are currently trading at absurdly cheap prices. I've mentioned a few here before: Microsoft (MSFT) and ExxonMobil (XOM) are two of my favorites.

These and stocks like them are an excellent start on a diversified portfolio that could earn you 10 times your money – remember, that's 12.22% per year for 16 years. Most stocks like this will compound your money at single-digit rates. But one or two could produce enormous returns.

You don't need to take on big risks to earn that kind of return. All you need to do is wait. To master the loser's game, you must be patient. You must master time itself.

BUFFETT BUYS INTO THE INCREDIBLE JNJ UPTREND

Big guru news this week: The world's best investor, Warren Buffett, is taking advantage of the investment system we introduced back in March.

The system is to buy shares of "World Dominator" health care stock Johnson & Johnson (JNJ) when it goes on sale.

JNJ has all kinds of attributes the seasoned investor demands from a stock. The company owns a suite of world-class brand names, like Listerine, Band-Aid, Neutrogena, Splenda, Rogaine, and Tylenol. It earns high profit margins. It sports a bulletproof balance sheet. And its dividend payout is as consistent as the sunrise.

JNJ is such a strong business that its shares tend to decline significantly only when investors lose faith in the stock market and capitalism. Such declines occurred in 2000, 2002, and 2008. All were opportunities to load up on JNJ shares and enjoy the resumption of its uptrend. Something like this is on Buffett's mind… The super investor spent the last quarter upping his stake in JNJ by 73%.

China's deliberate escape from the dollar continues

China more than doubled South Korean debt holdings this year, spurring the notes' longest rally in more than three years, as policy makers shifted part of the world's largest foreign-exchange reserves out of dollars.

Korean Treasury bonds held by Chinese investors rose 111 percent to 3.99 trillion won ($3.4 billion) in the first half of the year, data from the Seoul-based Financial Supervisory Service show. China should allocate some reserves to "financial assets in major Asian economies," Ding Zhijie, a former adviser to China's sovereign wealth fund, said in an Aug. 16 interview.

"The significance of both the dollar and euro has declined because of the global financial crisis and the European debt crisis, while the role of some emerging-market currencies rose," said Ding, dean of finance at Beijing's University of International Business and Economics.

China's holdings of Treasuries fell 6 percent in the first half to $843.7 billion, Department of Treasury data released this week show, making it harder for President Barack Obama to finance record debt sales to sustain the U.S. economic expansion. Societe Generale SA predicts Chinese KTB purchases, which accounted for 19 percent of foreign inflows in the first half compared with 10 percent last year, will spur further gains.

"At this rate China may buy about 4 trillion won of KTBs by year-end, and that's a big deal," said Christian Carrillo, the Tokyo-based head of fixed-income strategy at SocGen, France's second-biggest bank. "That will be bullish for the market. It'll create a severe demand-supply imbalance in the KTBs, pushing yields to fall even more aggressively."

Bond Returns

China's holdings of South Korean notes account for little more than 0.1 percent of its $2.45 trillion reserves. The increase in the first six months compares with $20.1 billion pumped into Japanese debt.

KTBs have handed investors a 5.6 percent return this year in dollar terms, delivering a profit every month, according to an index compiled by HSBC Holdings Plc. The advance marks the best winning streak since March 2007. U.S. Treasuries have gained 7.9 percent, according to the Bank of America Merrill Lynch U.S. Treasury Master Index.

Diversification should be the "basic principle" of reserve management, Yu Yongding, a former adviser to the People's Bank of China, said in an interview this month. Allocations to dollars in official reserves fell in the first three months, to 61.5 percent from 62.2 percent in the final quarter of 2009, the International Monetary Fund said June 30.

'Safe Haven'

The value of KTBs owned by China totaled 1.87 trillion won on Dec. 31, up from 79.6 billion at the end of 2008, FSS data show. Foreigners' total holdings increased by 18.6 trillion won in 2009 and climbed 11.3 trillion to 67.8 trillion in the first half. That's equivalent to 6.3 percent of South Korea's outstanding government debt.

"The number of long-term investors who view Korean bonds as a new safe haven has increased," Kim Jung Kwan, director of the Ministry of Strategy and Finance's government bond policy division, said in an interview last month. "Korean bonds are attractive in yields and liquidity, as well as for diversification purposes."

South Korea's benchmark three-year bonds reversed earlier losses, with yields reaching a two-month low of 3.72 percent as of 2:38 p.m. in Seoul, while the rate on similar-maturity U.S. debt was 0.77 percent. The three-year KTB futures contract rose 18 ticks to 111.53. Dollar-denominated returns may be boosted by gains in the won, which will strengthen 3 percent to 1,140 versus the greenback by the end of the year, according to the median estimate of 20 analysts surveyed by Bloomberg.

"Higher yields offered by KTBs and potential won appreciation would offer an attractive alternative to U.S. Treasuries for China," said Matthew Huang, a Singapore-based fixed-income analyst at Barclays Capital Plc. "Their total holdings are a drop in the pond relative to their total reserves."

A "MARKET-APPROVED" SHORT SALE

A special note for traders out there: One of Porter Stansberry's favorite "short sale" candidates is breaking down…

In today's age of government bailouts and boondoggles, we encourage trading-oriented readers to become familiar with the concept of short selling. A "short sale" is a trade that allows you to profit as a stock decreases in price, rather than as it increases in price. Few analysts are as skilled at finding these "headed lower" stocks than our colleague Porter Stansberry.

In just the past few years, Porter has nailed the bankruptcy of General Motors, Freddie Mac, and Fannie Mae. Porter targets businesses with declining revenues, obsolete business models, and big debt loads – businesses like USA Today publisher Gannett (GCI). Porter notes the newspaper publisher competes in a low-margin business that is suffering declining revenues… all the while trying to service a huge debt load.

As you can see from today's chart, the market likes Porter's thesis. After surging 800% off its March 2009 panic bottom, Gannett now sports the chart of a rocket that has run out of fuel. The stock has sputtered from $18 per share to $13 in the past four months. It just broke down to its lowest low in six months on massive selling volume. Trend followers, here's one to play on the downside…

Emerging markets guru Mobius: Global recovery is leaving the U.S. behind

The global economic recovery is "well in place" and may accelerate as growth in developing nations counters a slowing pickup in Japan and the U.S., according to Templeton Asset Management Ltd.'s Mark Mobius.

The so-called BRIC markets of Brazil, Russia, India, and China, as well as Turkey and South Africa, will drive the recovery, said Mobius, who predicted the bull-market rally in emerging markets in March 2009. The MSCI index of 21 developing nations has doubled since it bottomed out in March 2, 2009.

Goldman Sachs Group Inc. and Pacific Investment Management Co. Chief Executive Officer Mohamed A. El-Erian said this month there's at least a 25 percent chance of the U.S. falling back into a recession, while the Federal Reserve flagged a weaker- than-anticipated recovery in the U.S. Mobius said increasing liquidity will help shield developed economies including the U.S. from a so-called double-dip recession.

"That's the U.S., but the rest of the world is moving in a different direction," Mobius, who oversees about $34 billion as Singapore-based executive chairman of Templeton's emerging markets group, said in a Bloomberg Television interview. "Going forward, the numbers will get better and better."

Japan's gross domestic product expanded an annualized 0.4 percent in the three months ended June 30, while the U.S. economy grew at a slower-than-estimated 2.4 percent annual pace, data released this month showed. While China's growth slowed to 10.3 percent during the quarter from 11.9 percent in the January-March period, that was enough to help the economy overtake Japan as the world's second-largest.

'Not Too Bad'

"Even if we see a slowdown in China from 10 percent to 8 percent, that's not too bad," Mobius said. "If it goes to 5 percent, we'll get worried."

The stronger recovery in emerging economies has helped stock markets outperform those in developed nations. The MSCI Emerging Markets Index rose 0.3 percent as of 2:05 p.m. in Singapore, trimming its losses this year to 0.1 percent. The MSCI World Index was up 0.1 percent after having slumped 5.3 percent in 2010.

"Given that there won't be a double dip, we still think that there will be a continuing bull market," Mobius said. "Valuations are not as reasonable as they were at the beginning of 2009 and at the end of 2008. We can find opportunities, but they're not as easy."

In China, Templeton Asset Management is "selectively" seeking out consumer and manufacturing stocks as corporate earnings benefit from a shift in the economy's dependence on exports to domestic spending, according to Mobius. He's "not too interested" in the nation's banks, citing the prospect of an increase of as much as 20 percent in non-performing loans.

Brazil remains his top pick among developing nations, he said, citing the nation's natural resources and a shrinking income gap. He favors the nation's banks and raw material producers including Vale SA, the world's third-biggest mining company.

A CLASSIC PETER LYNCH WINNER

Our chart of the week displays that, in addition to tobacco companies, another business has shrugged off the recent market weakness and terrible job numbers.

That business is home movie rentals. Specifically, home movie rentals from Netflix (NFLX).

Netflix strikes us as a classic "Peter Lynch stock." The phenomenally successful money manager Lynch became famous for his love of investing in companies that earned the loyalty of friends and family. These days, most people we know are huge fans of Netflix and its easy-to-use red envelopes. We count ourselves as users. Ordering The Good, the Bad, and the Ugly online beats standing beside a smelly guy at Blockbuster.

As you can see from our chart of the week, this easy-to-use business is soaring right now. Revenue for the most recent quarter rose 27% from the same time period one year ago. The stock is up from $40 per share last summer to $130 today… and it's one of the few stocks able to strike a new 52-week high amid this week's huge selling pressure.

IT'S STILL A BULL MARKET IN CIGARETTES

Despite weak job numbers, weak earnings, and recent stock market weakness, today's chart says it's still a bull market in cigarettes.

We often poke fun at faddish investment ideas like solar and wind stocks. Instead of chasing these ideas, we say focus long-term investment in dominant businesses with fat profit margins and excellent brand names. Focus on stocks like the world's biggest cigarette maker, Altria (MO).

We've written bullishly about cigarette comanies many times in DailyWealth (check out a few pieces here and here). While it's easy to understand Marlboro's incredible brand power, most people don't understand the government loves it when folks buy Altria cigarettes. The government is even more addicted to the huge taxes it collects from Altria than Altria's customers are addicted to its product.

This addiction produces the chart you see below… the past 12-month's action in Altria shares. While stocks around the world have sold off in the past week, Altria has climbed to a new 52-week high, all the while kicking off huge dividend payments.

THE BIG MONEY IS STILL SELLING

Some of that big money we've been monitoring for the past few months returned yesterday… to sell.

The stock market enjoyed a 10% rally from early July to early August. But during the rally, there was little buying enthusiasm from huge institutional investors like mutual funds, pension funds, and insurance funds. A healthy bull market can only take place with strong buying interest from these mega players.

Below, we look at the recent price and volume action in the benchmark S&P 500. As you can see, the S&P suffered several high-volume selling periods in May and June (A). The subsequent July rally was marked by tepid buying volume (B).

Now note the past few days of negative action, which came on stronger volume (C). The index also sliced through its 200-day moving average… a "line in the sand" many investors use to demarcate bull and bear markets.

Although we're eternal optimists here at DailyWealth, we can only interpret this "weak buying, strong selling" trend as bearish action. We'll need to see a big money buying rally before we change our view…

YOU WON'T BELIEVE WHAT COUNTRY IS SOARING RIGHT NOW

Today, we'd like to give a big kudos to Casey Research and their work on Colombia…

To make extraordinary investment returns, you've got to be willing to put your money in investments the average investor avoids. This can simply mean buying out-of-favor assets. It can also mean investing in countries like Colombia.

As our friend Andrey Dashkov of Casey Research noted in the March 6, 2010 DailyWealth, Colombia is shedding its reputation as a dangerous drug haven to become one of the world's hot spots for natural resource investment. Although it's far from U.S. levels of safety and security, Colombia is reducing crime and adopting free-market measures… which are helping the country go from "bad to less bad" in the eyes of investors.

You can read more about this "bad to less bad" situation in Casey's Energy Report. For a picture of it, we look at the past year's trading of the Global X/Inter Bolsa FTSE Colombia 20 Fund (GXG). This fund is one of the few pure Columbia plays available to U.S. investors. Its major weightings are in Colombia's large oil and banking concerns.

As you can see from the chart, GXG is enjoying a tremendous uptrend… and has gained 35% in this year alone. This is a major adjustment of investor attitudes toward what some used to call the world's largest "narco-democracy."

"The U.S. is bankrupt and we don't even know it..."

Let's get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement, and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: "Directors welcomed the authorities' commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP."

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: "The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates." It adds that "closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP."

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It's also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

'Unofficial' Liabilities

Based on the CBO's data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our "official" debt and our actual net indebtedness isn't surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities "unofficial" to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions "loans" and called our future benefits "repayment of these loans less an old age tax," with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn't affected by fiscal labeling. It's the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today's dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: "Something that can't go on, will stop." True enough. Uncle Sam's Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates, and consumer prices. This is an awful, downhill road to follow, but it's the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won't affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government's credit-card bill and each year's 14 percent of GDP is the interest on that bill. If it doesn't pay this year's interest, it will be added to the balance.

Demand-siders say forgoing this year's 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no-pain, all-gain "solutions."

THE BIG MONEY ISN'T BUYING THIS RALLY

To recap, a healthy bull market is driven by the buying power of mutual funds, hedge funds, and insurance company funds. These investors control multibillion-dollar portfolios. Only with strong buying enthusiasm from these folks can a real bull market flourish. Today's chart shows anything but enthusiasm…

Our chart displays the past six months of trading in the Dow Industrials investment fund (DIA). This is a basket of America's biggest, most important companies. Below the price chart, you'll find a window displaying the fund's daily trading volume. The red bars represent trading volume on days the fund declined. The gray bars represent trading volume on days the fund advanced. The taller the bar, the greater the volume.

As you can see below, trading volume boomed during the May selloff (A)… and selling power remained strong through the final tough days of June (B). Now note how the recent rally has come on tepid volume (C). Some of this "where's the big money?" action can be attributed to money managers taking their summer vacations. But even taking vacations into account, this is a bearish lack of buying interest.

New Chinese rating agency could wipe out S&P, Fitch, and Moody's

Guan Jianzhong, the head of one of China's three big credit rating agencies, sees the criticism of Standard & Poor's (MHP), Fitch Ratings, and Moody's Investors Service (MCO) for their role in the global financial crisis as creating an opportunity. He wants his firm, Dagong Global Credit Rating, to enter the U.S. market. "Without a challenge to the status quo, the big ratings agencies won't improve their methodologies on their own," says Guan, who is Dagong's chairman.

Dagong, which has never rated a company outside China, made a splash with its first analysis of international sovereign debt, which it issued on July 11. The report, covering 50 nations, awarded the Chinese government a higher credit rating, at AA+, than the U.S., the U.K., and Japan. Guan says the results highlight the differences between Dagong's approach and that of its rivals. The established agencies, he says, tilt their ratings to reflect "their beliefs and ideology" and the "interests of the borrowing countries" in the West. They place too much emphasis on the nature of a country's political system, the independence of the central bank, and per capita gross domestic product.

Dagong, in contrast, focuses on a country's fiscal health, foreign currency reserves, and ability to create wealth. The big developed countries like the U.S., Britain, and Japan, says Guan, use "over 90 percent of the world's credit resources, but their GDP growth doesn't contribute a lot to the world economy, especially after the financial crisis."

A graduate of Shanxi University of Finance & Economics, Guan worked in finance in New York for several years before returning to China. He became Dagong's chairman in 1998. Last month he was elected director of the government-backed industry group, the China Securities Credit Rating Committee.

Dagong was founded in 1994, a decade after state-owned firms were allowed to issue bonds in China. In December 2009 it spent 10 million yuan ($1.48 million) to prepare and submit an application with the U.S. Securities & Exchange Commission to become a recognized ratings firm. The SEC will hold a hearing on the application in September. The SEC has granted recognition to 10 ratings firms, with only two based outside of North America, both in Japan.

"They certainly picked a good time—global confidence in the existing ratings agencies is probably at an all-time low," says Tom Orlik, China economist at Stone & McCarthy Research Associates in Beijing. Yet it's not clear that Dagong has developed the credibility to compete globally. "Whether they'll be able to successfully push that outside of China, where's there's deep suspicion about the cozy relationship between government and companies, is difficult to foresee," says Orlik.

Like S&P, Moody's, and Fitch, Dagong is paid by the companies it rates. Guan says issuers, especially politically connected companies, also shop around among mainland agencies for the best rating. Gaun says his firm does not allow government connections to influence its ratings. "We want to be an internationally renowned credit-rating agency," he says. "Because of this, we can't provide ratings that aren't independent."

During a time of market anxiety over big budget deficits in the U.S. and Europe, Dagong could become a powerful player given China's trade surpluses and enormous foreign exchange holdings. "It's to their benefit that they're adding the voice of the world's largest global creditor," says William Hess, managing director at China Analytics, an economic research firm in Beijing. "If and when [Chinese investors'] funds start to follow the ratings coming out of China, then that's something that would really make markets sit up and notice."

It takes time to establish that kind of presence. Dagong should focus on China to "build up their reputation and influence," says Wang Yang, co-head of fixed-income research at UBS Securities (UBS) in Beijing. "At this point, I don't think they are ready to expand globally."

The bottom line: With Western credit ratings firms under fire, China's Dagong sees an opening to expand in the U.S. and other foreign markets.

THE MARKET LOVES THE "CONTRARIAN'S COMMODITY"

Early this year, we began recommending oil's clean cousin, natural gas. Natural gas is used to produce fertilizers, plastics, and various chemicals. It's also a major source of fuel for firing electrical power plants and heating homes.

We call natural gas the "contrarian's commodity" because huge new domestic gas supplies have come online recently… which has sliced the price of "natty" by more than 60% since 2008.

Our thesis is not that a big rally in natural gas is in the cards… simply that the fuel is done falling and the situation for natural gas prices is getting "less bad." This allows our preferred vehicles for gas investment – U.S. royalty trusts – to pay out fat distributions.

As you can see from today's chart of royalty payer San Juan Basin, the market likes this idea. Since our recommendation, San Juan has enjoyed a steady uptrend… and has kicked off large monthly yields… all the while producing a commodity at blown-out levels. We love it when a plan comes together…

Four Must-Reads That Will Radically Change Your View of Stocks

Most people view the stock market like a lottery game. They make short-term bets on businesses they know little or nothing about… and generally lose money.

But there's another way to practically guarantee you'll make money in stocks. It requires you to stop obsessing about the market's day-to-day fluctuations and learn something about the businesses you're buying and selling.

You can learn about this method in a number of ways. But I think a great introduction is to read three short books, and one important chapter of another book. By the time you've read all four, a lightbulb ought to switch on in your head. You should be convinced there's a better way to buy stocks than making random guesses about short-term share price movements.

Last fall, at my publisher's annual lifetime subscriber meeting, I was asked for a single book recommendation. I enthusiastically recommended Joe Ponzio's F Wall Street, which I had just finished a few hours earlier.

F Wall Street teaches you to think about the value of a business first and forget about the price of it until you understand the value well enough. That's what all the best investors say. Look past the noise. Look past the short term. Forget about market risk… F – Wall Street! Focus on value. Be a business analyst, not a market follower.

I probably shouldn't tell you any of this. If you gained expertise in valuing businesses, you'd almost never buy stocks. Most public companies are simply too hard to value. Those that aren't too hard to value spend most of their lives overvalued by Mr. Market. When I tell my readers I'm having trouble finding "cheap stocks," it goes without saying I mean "cheap stocks I understand well enough to value."

Ponzio also provides a reasonable shortcut method "for 'armchair' investors who see the value in stocks, want to stick with large, stable companies, and don't want to invest hundreds of hours of research each year."

Ponzio's final chapter is on patience, another hugely important concept. As I showed my Extreme Value readers in my August issue (out yesterday), mastering time is the most important factor in any investment plan. If you can't learn to be patient, you simply cannot make money in stocks. If you can be patient enough, success is virtually guaranteed.

Overall, F Wall Street is well-written and highly readable. It's also worth rereading. I keep it within arm's reach at all times when I'm at home. Most financial books stink. This one is great. Read it and learn from it.

Another valuable investing book is Joel Greenblatt's classic, The Little Book That Beats the Market. Using a simple story that's a joy to read, Greenblatt teaches the reader the ideas behind his Magic Formula investing concept. Magic Formula investing is a simple idea that says you should buy the best businesses when they're trading at suitably cheap prices. Greenblatt offers simple metrics and guidelines so you can learn to identify a good business and know when it's cheap enough. Greenblatt's book, too, is worth rereading. It's next to Ponzio's book on my shelf.

Another book I often recommend is Frank Singer's little 27-page masterpiece, How to Value a Business. Singer's booklet provides a simple formula for valuing a business, which requires that you estimate the probability of a company's earnings occurring.

Think about that. Most people take the earnings for granted. They don't bother wondering about the likelihood of earnings occurring. There are many highly cyclical businesses out there. Once you get real about the likelihood of a given level of earnings happening again, you start realizing a lot of stocks are just too risky to fool with.

Singer's book also prompts you to think about three different types of value: liquidation value, stock value (which is really IPO value), and ongoing business value. Liquidation value is not the subject of the book. And Singer admits there seems to be no sense or logic to IPO valuations.

What Singer does is provide you with basic tools to understand the value of an ongoing business. He also shows you how ongoing business value can be much higher for a strategic acquirer than for an investor like you or me. A strategic acquirer is another company in the same business. Businesses are worth more to strategic acquirers because the key inputs, the earnings, and the probability of the earnings occurring are higher for the strategic buyer. He buys the business because he thinks he can wring more profit out of it. And he thinks higher profits are highly certain. So he pays more. Like Ponzio and Greenblatt, Singer's book contains good examples and anecdotes.

The other must-read I recommend most consistently is Chapter 20 of Benjamin Graham's The Intelligent Investor. The chapter is called "Margin of Safety as the Central Concept of investment." I recommend you reread it once a month. It's that important.

Once you learn about value, you have to keep in mind business values are inherently imprecise. You can't pinpoint them. You can only estimate them within a given range. Margin of safety is simply the margin for error investors need because it's impossible to pinpoint business value.

For example, if you think a company's stock is worth $100 a share and you buy it for $95 a share, you don't have a real margin of safety. If that $100 company is a World Dominator and you buy it for $75 a share, you're getting a margin of safety. Say the company is a riskier business, not a World Dominator. In that case, you'll want a bigger margin of safety. You might want to wait until it sells for $60, or even $50, a share.

If most investors learned to value a business, they might exit the stock market altogether. My guess is most stock investors who learn to value a business become very picky about the stocks they'll own.

They buy less often, sell less often, and hold longer.

And they make more money.

BUYING AFTER THE DISASTER WORKS AGAIN

Several weeks ago, we noted how the "Deepwater Horizon" effect had crushed offshore drilling specialist Diamond Offshore. Despite being one of the field's most elite companies, and despite having limited exposure to the U.S. market, Diamond shares declined a huge 35% in just months. Investors simply dumped everything associated with sticking a pipe in the ground.

Just after our bullish note, Diamond backed off a few dollars per share. But as you can see from today's chart, this decline was a "fake out before the breakout"… And yesterday's trading sent the stock soaring to a new two-month high.

Despite that bit of price strength, Diamond still trades for only eight times earnings. This looks like a solid bottom from which to get long offshore drillers like Diamond and Ensco. As we mentioned a few weeks ago, you have an unloved sector, you have cheap valuations, and now you have prices moving in your favor. It's what the contrarian, "buy after the disaster" trader is always looking for.

EXXONMOBIL'S BIG COMEBACK

Nearly everywhere we look, we see huge amounts of money flowing back into "good time" trades.

During May and June, stock sectors that depend on a robust global economy – "good times" – took major hits to their asset values. They included home improvement giant Home Depot (home spending), base-metal miners (manufacturing and infrastructure spending), and transportation stocks (the shipping of goods).

Among the selloffs we found most worrisome, however, was America's largest public company, ExxonMobil (XOM). XOM is one of the best managed businesses in the world… and it's considered one of the world's most stable, most solid companies. In May and June, the stock sold off heavily. If folks can't stand the thought of owning XOM, it's a terrible sign for the overall market.

As you can see from today's chart, XOM suffered a decline from $68 per share to below $57… a huge move for such a large company ($320 billion market cap). But like many assets, shares have enjoyed a major rebound in the past few weeks… and have climbed back north of $62. Put this action in the "good news and good times" column.

MAJOR NEW STRENGTH FROM CHINA

With today's chart, we pass along one of the most impressive showings in the market right now. It comes courtesy of China…

As the workshop to the world and its most important commodity consumer, China is a critical economy to monitor. If China is struggling, manufacturing firms around the world are struggling.

In early April, China's benchmark stock index, the Shanghai Composite, began a major decline that shaved 22% off the index in just over two months. During the decline, we labeled the 2,600 area a "must hold" level to convince us things were holding together in China.

As you can see from today's chart, the Shanghai Index briefly dipped below 2,600 in late June. But in the past few weeks, it has staged an incredible rally to climb back above the level. This new strength is no cause to stop worrying about China's economy… but it's a major step in the right direction for stock market bulls.

PASS THIS ALONG TO THE WHITE HOUSE

This week's chart is more of what is the most important investing trend of our lifetimes… the trend of "Asia up, the West not so much."

To recap, as long as the Western economies of the U.S. and Europe lumber around with giant parasitic high-tax nanny-state governments on their backs, expect much better economic news to come from the dynamic, lower-tax, less welfare-inclined economies of Asia. One of our favorite stories tucked inside this trend is the city-state of Singapore.

Singapore is one of the great "trophy" assets of the world. It sits at the center of the booming East Asia/Australia region. It's a major financial center. It's home to the world's largest water port. Most importantly, it's considered one of the world's easiest places to set up and do business (read about its incredible "economic freedom" score here).

While stock markets in the U.S. and Europe are struggling to make headway this year, this week's chart shows that the big Singapore investment fund (EWS) just struck a new 52-week high. Someone please forward this chart to the fools in Washington… Tell them they can keep their high taxes, their bailout boondoggles, and their wasteful stimulus spending. Give us the low-tax, earner-and-saver-friendly Singapore model. Oh… and your "Hope?" If that hope comes with your fangs in our necks and your hands in our pockets, you can keep that, too.

A HUGE BEAR MARKET IS ENDING

This week brings good price action for uranium bulls like our colleagues Marin Katusa, Chris Mayer, and Matt Badiali…

The bull case for uranium – the chief fuel for nuclear reactors – is that "emerging" Asian nations are embarking on a building spree of nuclear plants to meet a portion of their growing electric needs. Meanwhile, new supply is unlikely to rise in lockstep with all this new demand.

These factors produced a more than 10-fold rise in uranium from 2003 to 2007… The end of that rally was fueled by speculators, who helped produce a subsequent crash. This crash hammered uranium prices and the companies associated with the stuff. But as you can see from today's chart of Uranium Participation Corp, uranium investment is getting a little "less bad" these days.

Uranium Participation Corp is no mining or exploration company. It's simply an investment vehicle that hoards uranium and acts like an exchange-traded fund for the stuff. The stock has been locked in a major downtrend over the past few years. But over the past few weeks, it has broken out of this downtrend. It's no sure indicator the bear market in uranium is over, but it's a step in the right direction…

Top currency fund: It's time to buy the dollar

FX Concepts LLC, the hedge fund that bought the euro in June just as it began a 9.7 percent surge against the dollar, now says it's almost time to get out of the currency.

The firm, which manages $8 billion in assets, expects the euro's advance from a four-year low on June 7 to come undone by September, partly because European austerity programs will start to weigh on growth. Reports last week that showed Spanish consumer confidence falling to the lowest level this year and banks tightening credit standards in the region suggest the budget measures may already be undermining the recovery.

The same fiscal measures that helped restore confidence in the euro may soon weaken the region's economies and torpedo the rally. A July 30 survey of 21 money managers overseeing $1.29 trillion by Jersey City, New Jersey-based research firm Ried Thunberg ICAP Inc. found 75 percent don't expect Europe's common currency to strengthen over the next three months.

"Austerity is really bad for growth," said Jonathan Clark, vice chairman at New York-based FX Concepts, the world's biggest currency hedge fund. "In the U.S., austerity is mainly on the state level, but in Europe they are whole-hog into cutting spending to reduce deficits. Under a pessimistic scenario, the European currencies are in a lot of trouble."

Spending Cuts

Spain, Portugal, and Greece will reduce spending by an average 4.3 percent of gross domestic product from 2009 to 2011, said Gilles Moec, an economist in London at Deutsche Bank AG, Germany's largest lender. The euro area will expand 1.5 percent this year, less than a previous estimate of 2 percent, UBS AG, the biggest Swiss bank by assets, said in a July 16 report.

The cuts contrast with the U.S., where President Barack Obama signed into law a $34 billion extension of unemployment benefits last month. The Congressional Budget Office projects a record $1.47 trillion deficit this fiscal year ending Sept. 30, and $1.42 trillion in 2011.

While U.S. growth is slowing, it beats the European Union, where a 750 billion-euro ($981 billion) backstop for the region's most indebted nations stabilized the currency after it slid from $1.5144 on Nov. 25 to the June 7 low.

U.S. GDP grew at a 2.4 percent pace in the second quarter, compared with 3.7 percent in the prior period, the Commerce Department in Washington said July 30. Corporate spending on equipment and software jumped at a 22 percent annual rate, the biggest increase since 1997.

The median second-quarter estimate for the euro region is 1.30 percent, and 1.10 percent for the year, based on a survey of 20 economists by Bloomberg.

Budgetary 'Zeal'

Federal Reserve Chairman Ben S. Bernanke said July 22 more fiscal stimulus is needed to support the U.S. recovery. European Central Bank President Jean-Claude Trichet is taking the opposite tack, writing in the Financial Times that industrial countries should begin addressing deficits now. The ECB meets Aug. 5, and will likely keep its key interest rate at 1 percent, according to all 51 economists surveyed by Bloomberg.

"We continue to question the sustainability of the euro's recent rebound given the zeal with which European officials have embraced fiscal consolidation," said Mansoor Mohi-uddin, global head of currency strategy in Singapore at UBS. The world's second-biggest currency trader, after Deutsche Bank, predicts the euro will end this year at $1.15. "We expect the euro to face renewed downward pressure."

Raising Estimates

The euro strengthened 1.1 percent to $1.3052 last week, capping the biggest monthly gain since May 2009. While it rallied against the greenback in the five trading days ended July 30, it was little changed based on Bloomberg Correlation- Weighted Currency Indexes, rising 0.1 percent. It gained 0.2 percent to $1.3080 today.

Rising confidence in Europe's economy and a slowdown in the U.S. helped quell speculation the 16-nation currency union would splinter. Goldman Sachs Group Inc., Wells Fargo & Co. and at least 12 other firms raised their estimates for the euro in June or July, Bloomberg data show. The 15 percent slide in the first half also proved a boon for German exports.

The number of unemployed Germans fell in July to the lowest level since November 2008, the Federal Labor Agency in Nuremberg said July 29. The same day, an index of executive and consumer confidence in the region compiled by the European Commission in Brussels rose to the highest level since March 2008 in July.

'Great Deal'

"Governments have done a great deal bringing stability back to the region, and that will manifest itself in a stronger euro in the longer term," said Fabrizio Fiorini, head of fixed income at Aletti Gestielle SGR SpA in Milan.

The bears say Germany will be unable to prop up the euro much longer as the Frankfurt-based ECB's quarterly Bank Lending Survey released July 28 showed banks tightening credit. Consumer confidence in Spain fell to minus 26 last month from minus 25 in June, while sentiment in Portugal and France matched their lows for the year, the commission said July 29.

The euro may reach $1.33 before falling along with stocks, according to Clark at FX Concepts. The median estimate of 39 strategists surveyed by Bloomberg is for it to weaken to $1.21 by year-end.

The euro "will correlate strongly with equities," Clark said. "We are expecting equities to turn around and go down into the second quarter of next year or longer."

The MSCI World Index advanced 8.9 percent since the euro rally began eight weeks ago.

Bond Signals

Record gains this year by longer-maturity German bonds show investors are concerned growth across Europe may wane. Securities due in 2020 and later returned 13.8 percent, the most since the euro's introduction in 1999 and compared with 13.1 percent for similar-dated Treasuries, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show.

"There's still a lot of stress in the euro-zone economy," said Shahid Ikram, deputy chief investment officer at Aviva Investors. The market is "probably viewing the debt burden as being deflationary. Any reduction in debt is likely to impinge on the potential rate of growth," he said.

The fund management division of Britain's second-largest insurer, which oversees $403 billion in assets, is looking for opportunities to bet the euro will weaken against the dollar, Ikram said.

Currency Options

Demand for options granting investors the right to sell the euro versus those giving the right to buy suggests eight weeks of appreciation may peter out.

The euro's three-month option risk-reversal rate was minus 2.14 percent on July 26, approaching the most since June 29. When negative, the measure means demand for options giving the right to sell the currency is greater than demand for those that allow purchases. The rate was minus 1.71 percent today.

"The fiscal challenges facing the euro zone remain immense," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto and the most accurate foreign- exchange forecaster from the end of 2008 through the first half of this year based on data compiled by Bloomberg. Osborne forecasts the currency will depreciate to $1.08 by year-end.

"The euro needs to go lower to try and help some of the fiscal bite that is going to start to have an impact on some of the more peripheral economies," he said.

A weaker euro may help companies in the region as it boosts competitiveness and makes revenue earned overseas worth more when it's brought home. Eni SpA, Italy's largest oil and gas company, said July 28 second-quarter profit jumped 81 percent as crude prices climbed and the euro declined.

Gary Shilling, president of the economic research firm A. Gary Shilling & Co. in Springfield, New Jersey, has predicted the euro may drop to parity with the dollar since January. He was correct in all 13 of his investment guidelines for 2008.

"This has really just been a lull between storms in Europe," Shilling said. "We still have a situation where the likelihood of defaults and restructuring in Greece, and probably Portugal and Spain, are still very high. That doesn't mean they won't be bailed out, but the turmoil that is likely to result should drive the euro lower."