It is in America?s interest to let the US dollar grow weaker. If the dollar strengthens, the US will have more unemployment because its goods will become more expensive and it will export less. US deficit will also increase with a strong-dollar policy. The bailouts for the rich are killing the economy.

Why is a weaker dollar a boon (in disguise) for American hedge funds, pension funds and other institutional investors? One of the side effects of a weaker dollar is that the returns for foreign investors who invest in US assets are diminished. While the value of the assets may rise in dollar terms, if the dollar is losing value, investors take a hit when they convert funds back into their domestic currency.

For example, while the S&P 500 has risen 20.2% so far this year in US dollars, investors outside of the US have generally seen much less impressive returns. The YTD returns of the S&P 500 for investors in various currencies indicate that the Argentine Peso is the only currency that has benefited from the currency translation. Returns have been diminished once fluctuations are taken into account for all the other currencies. And, of course, some countries have been affected more than others. So far this year, Brazilian investors who bought the S&P 500 at the end of last year have lost nearly 12 Reals for every 100 they invested on January 1.

Even though the non-farm payrolls report of January 8 was weaker than expected (-85,000), November?s report was revised from a loss of 11,000 jobs to a gain of 4,000 jobs. Unless this reading is revised again next month, November?s gain (albeit small) puts an end to the longest monthly streak of job declines since at least 1940. Beginning in January 2008, the US economy posted a record 22 consecutive months of job losses for a total decline of 7.16 million jobs. If we include December?s losses in the calculation, the US economy has now lost 7.24 million jobs over the last two years.

Given the fact that the US economy just went through its longest streak of monthly job losses in at least 70 years, there really is no way to sugarcoat the misery in the US labour force over the past 2+ years. Even if we look at the data based on a percentage of the US workforce, the declines are among the highest ever. Over the last two years, total non-farm payrolls are down 5.24%. The only other time where we saw a larger decline over a two-year stretch was way back in 1946, when total non-farm payrolls declined by nearly 10%. However, we would note that in 1946, the US was transitioning out of wartime and into a peace time economy. At any rate, the numbers are clearly trending in the right direction now and the worst definitely appears to be over for this cycle.

S&P 500 will hit 1,200

As far as the stock market is concerned, the Lehman bankruptcy just happened. The S&P 500, the world?s most tracked index, is now almost exactly at its low in the week following the Lehman disaster of September 15, 2008. The Fibonacci retracement lines, derived from the mathematical Fibonacci sequence that mathematicians believe have great predictive significance, also reveal a trough in March 2009.

According to this theory, the retracement from top to bottom of 50% will be met with resistance, and we have indeed seen markets spend quite a lot of time consolidating around that level. However, now that the markets have broken past the 50% mark, the next resistance will be at 61.8%, which translates into about 1,200 on the S&P 500. There is no reason to suspect that the markets will not be able to test 1,200 on the S&P 500.

There could always be questions about the Fibonacci theory. However, so many traders act on it that scepticism could lead to a self-fulfilling prophecy. A lot of bad news had already been priced into stock prices, and the S&P must still rise by 37% to get back to its high, in nominal terms. But the risks of a true catastrophe that arose from the Lehman debacle and the inadequate government response have now been removed from the equation, at least according to the market.

What does this imply for the future? Technical measures (patterns in price movements) and fundamentals (the estimated value of companies) send slightly different messages but they are consistent.

Chartists point out that when the S&P passed the 1,120 level, it had recovered exactly half the ground it lost from its October 2007 peak to its March 2009 trough. Traders take these things seriously and the S&P had tried and failed to breach 1,120 several times before doing so. Breaking through is a bullish sign and should mean that it can keep going until its next level of resistance at 1,228 (where it will have retraced 61.8% of its losses).

Fundamentalists look to the price/earnings ratio, which on a cyclically adjusted basis (taking price as a multiple of earnings over 10 years), is now back above 20. The historic average is 16.3, and the market traded below 20 on this measure from 1969 to 1993. It is only a year since it dropped below 20. On this basis, the S&P could certainly go up further. It reached 22 in the late 1930s before the second dip of the Great Depression, and peaked above 40 during the dotcom bubble.

With earnings season around the corner, everyone is worried about the topline revenue numbers, especially in the US, which has been at the epicentre of the financial crisis. During the last results season, 59% of the US companies have beaten revenue estimates for the quarter, which is the highest reading over the last five earnings seasons. While it?s not in the 70-80% range we saw during the last bull market, the direction of the revenue ?beat? rate is trending higher, which is a positive sign for the market.

Chinese interest rates

Chinese property stocks are the leading global indicator currently. The Shanghai Composite Property Index, made up of 33 Chinese real estate and construction companies, was among the first to tank in 2007 and the first to start rallying back in November 2008. Because China stimulates its economy through real estate, if China is building, commodities will go up. Since the realty companies are sensitive to commodity prices, they will be among the first to detect inflation. Currently, these stocks are not as unambiguously positive as they were three months ago.

Yet, China is in no mood to let the renminbi appreciate, which means it will keep interest rates at the current level till world growth becomes more durable. Until then, the stock market party could be expected to continue. When China raises interest rates, it will have a ripple effect through global equity markets.

Historically, it is very rare for stocks to outperform bonds while unemployment is rising. The disjunction can either be cured by falling shares or rising employment. And the most likely resolution, which bodes well in the short run for equity investors and incumbent politicians, is that US unemployment will fall. Initial claims for jobless insurance have been a good leading indicator for the unemployment rate in the past. They peaked last March and have fallen consistently since then. Without an improvement in joblessness, however, Wall Street and Main Street may converge in another way. The fact that US unemployment is finally beginning to stabilise at a lower level seems to indicate that the outperformance of world stocks relative to US bonds has much more steam left.

An undisciplined and loose monetary policy will continue to exist in most parts of the world in 2010, even in the face of existing and growing slack. This could keep gold and long Treasuries higher. We could also witness a geopolitical risk such as fresh tensions in North Korea or Iran, which will keep up the excitement in commodity markets that are most vulnerable to such exogenous shocks, especially in commodities like oil.

In simple terms, a mortgage reset is when a mortgage comes due. In normal times, refinancing is a simple process but these are not normal times. Some points of interest:

1. In September 2008, the mortgage resets hit $35 billion. That was the exact time the financial crisis hit. When people could not afford to refinance and began to default, the stock market and banking industry crashed.

2. In the summer of 2009 mortgage resets were low?around $15 billion a month. This is when optimists began to see ?green shoots? in the economy. These green shoots were the eye of the storm. By late 2011, the resets are expected to climb to nearly $40 billion a month. The storm will not end until 2012. World stocks are expected to continue their upward march, until government bills fall due for payment some time in the middle of 2011.

(Concluded)

The author is a Wharton Business School MBA and CEO, Global Money Investor