Mark Axelowitz, director of wealth management at Morgan Stanley Smith Barney, and adviser to very high net worth individuals, was recently on CNBC's Fast Money program discussing trends that he has noticed among ultra high net worth individuals (see CNBC article).

Source: CNBC Video
Just as many investors are jumping back into stocks, essentially afraid that they may have missed the recent rising market, ultra high new worth individuals are more cautious, and appear to be worried about inflation, the dollar, and of course, taxes. This macro-economic perspective has kept the rich from chasing the recent rally, and instead has them investing heavily in fixed income instead of equities as they shy away from diving into the market with both feet. The rich stay rich for a reason. Maybe it is time to pay attention.

A lot has been written about the cause and effect between the falling dollar and the rising price of crude oil. It is usually assumed that the falling dollar is resulting in the price of crude oil being higher than it should be. This is the position that OPEC has recently stated. As reported in the Economist, Harvard economist Jeff Frankel argues that low real interest rates lead to higher commodity prices such that when real rates fall, commodity producers have more incentive to keep their asset rather than sell. This also gives speculators an incentive to sector shift into commodities.

The correlation between the euro/dollar exchange rate and the price of oil has risen over the last few years, increasing from 1% between 1999 and 2004 to 52% in the past six months. Others argue that the link is also influenced by accounting since if the dollar falls, the dollar priced commodity must rise for its overall price to remain consistent and stable. But commodity prices have increased against other commodities as well.

But is the correlation the other way around? Analysts at Goldman Sachs feel the correlation is in the opposite direction. High crude oil prices drive the dollar down since oil exporters import more from Europe than America, with less of their revenues in dollars. Another possible reason for the correlation is that many emerging economies peg their currency to the dollar, and therefore also have a loose monetary policy. These loose dollars increase domestic demand, thereby putting pressure on all commodities, especially crude oil.

In the end, both effects are related to the dollar and may be having the same result, whether rates are low - thereby driving up dollar dominated prices, or whether lower interest rates are promoting a looser policy - thereby increasing demand.

The market is at an interesting inflection point. Wednesday gives us a the ADP Employment report, the GDP report, and a Fed rate decision. In the mean time, there is a move into tech from dollar related equities and commodities, such as the agriculture plays, energy plays, and large cap internationals (that may see a wash for any Fed cut - dollar move). Finance and market geeks love this kind of stuff, even though the hours and even days before can get kind of boring as the market waits for the Fed news. Given that GDP and an employment report are also coming out beforehand, and that the market has been doing some sector rotation in advance of the Fed decision, things have at least been a little more interesting, and somewhat of a preview of what is to come.

Up first will be the ADP Employment number, which while sometimes predictive of the Friday jobs number, has also been a somewhat unreliable indicator. The market is expecting a -60,000 loss.

Next will be the advanced GDP report for Q1. The market is expecting a 0.5% value for GDP. Given that is number can be "inflated" a little, it will be important to dig into the details. Since recessions are defined by two negative quarters of GDP, there is certainly interest in having a positive GDP, even if small. It is not that the number will be faked, but high inventories in particular can cause the number to look better than it actually is. High inventories affect the calculation by raising the number, but as any business knows, excess inventories is not usually good. Not only do they cost more to insure and store, but just because an inventory item is complete and ready to sell does not mean it will translate to accounts receivable anytime soon while it sits on the shelf. Economist, and the market, will be watching the inventory levels.

Later in the afternoon we will get the Federal Reserve decision. The Fed Fund Futures are pricing in a near certain chance the Fed will cut by 25 bps. Anything more would certainly not send a good signal. No cut, and probably even a 25 bp cut with a tightening bias would be bullish for the dollar, and subsequently negative for those stocks and commodities that have benefited from the lower dollar - such as agriculture plays, energy plays, and large-cap industrials with large international exposure.

Of additional interest in the Fed announcement will be the number of dissenting votes, if any. The money market futures are already pricing in rate hikes next year, so chances are there may be some dissent if we get a cut, as with the last few meetings. What may bring everyone to the table in agreement is a change in bias - allowing the Fed to further highlight that the tide has changed.

As already mention, the market is anticipating an end to the rate easing cycle. Combined with the recent Barron's article discussing how the dollar may have finally hit bottom, traders have already begun to cycle out of commodities, which have run-up considerably since the beginning of the year, and into select technology stocks that have recently reported good earnings and/or have given good guidance.

Put options on the USO crude oil ETF have also been increasing, with 2/3rds on the short side, while the DUG Ultrashort oil ETF has seen triple normal volume. While a long shot, recent chatter in Washington about the problems caused by Ethanol could cause the bottom to fall out further for the soft ag commodities, although that may be expecting too much in an election year. Commodity related stocks, such as Deere have sold off, while the fertilizer companies, such as Mosaic, Potash, and Agrium are also correcting after recent parabolic moves. Nonetheless, downward moves might be short lived if demand for grains continue to increase, regardless of Fed decisions and dollar moves. Crude oil and natural gas will also see demand and supply pressures, with crude seeing some of the dollar premium taken out as the Fed begins to tighten, or imply an end to easing. Of course contrarians may be smiling, given how the increased short positions in oil could go badly for the longs if the market does not get what it wants.

Only time will tell. It should be an interesting summer, regardless.

Tickers: AGU, POT, MOS, DUG, USO, DE

Barron's has an interesting article this weekend about whether the dollar is ready to rally - something that has recently been discussed quiet often in various television and print media outlets. Of interest from the article:

"In an April survey conducted by Merrill Lynch, 50% of global money managers said the greenback is undervalued, up from 30% three months ago, while a whopping 71% found the euro overvalued."

"Our own "Big Money" poll of nearly 120 money managers ... found most waiting for a massive unwinding of the recent short-dollar, long-commodity crush: Nearly three-quarters say they expect the dollar to rise against the euro over the next 12 months, while 66% see commodity prices falling in the next six months."

The article also mentions how reserve managers are unwilling to sell dollars at their current low levels, hinting that many feel we may be approaching a bottom, or at least at levels that they don't want to get caught selling at the low.

If the dollar does rally against the Euro and other currencies, investors can expect to see an effect on the price of oil and other commodities. Some estimates have 50% or more of the recent moves in oil, which is denominated in dollars, being currency driven. With any fall in crude oil, we may also expect to see some effect on metals/minerals and agriculture commodities. Agriculture commodities have inadvertently been linked to energy prices, along with the fertilizer companies which have benefited from their growth. Large multi-national industrial companies, which have benefited from selling cheaper products overseas, may also be impacted. Of course, there are always caveats. Regardless of currency moves, demand for both energy and commodities is still expected to stay strong. The large industrials, which will benefit from lower energy and commodity prices, will also see some tangential benefits that may help to offset currency moves.

The recent issue of Barron's has an article with Jim Rogers. While Rogers can get downright depressing at times, the truth sometimes hurts, and is certainly good to hear every now and then (imagine that). Beyond commodities, Rogers mentions that "perhaps the safest investment is the renminbi, the Chinese currency." Rogers has a built in bias toward China (he even moved there so his daughters could learn Chinese), but the strength of the Chinese economy does bode well for the renminbi. A spread between the renminbi and dollar, even with a potential dollar rally, might not be too bad an investment, especially given the amount of U.S. debt in China and throughout Asia. Rogers is also buying airlines, mainly international airlines, partly due to the increased fares and full planes he is observing. As for commodities, Rogers believes we are not in the initial stages of the commodity bull market, which probably began around the turn of the century, but somewhere in the middle with maybe 10 more years to go before we see a long-term reversal. Even so, he expects to see some corrections over the next 10 years, but does not expect to see overall commodity demand fall off. Given that no major mines or fields have been found recently, and the fact that it takes a long-time to even bring a new mine or field on-line, the bull market in commodities looks fairly safe for the foreseeable future.

Forbes is speculating how the "euro experiment" may come to a soon end. The problem is that each of the euro-based countries has its own unique monetary problems. Apparently there is growing tension in countries with inflationary pressures (such as Germany, Austria, and the Netherlands), and countries with growth pressures (such as France, Italy, and Spain). If countries start to break from the euro, the spiral unwinding could be hard to stop. To take advantage of a break from the euro, the author suggest shorting the euro and buying the dollar, or possibly selling investments in Italy and Spain, while buying fixed-income assets in Germany.