6/4/2012 6:15 PM ET|
Profiting from the dollar's might
The eurozone mess has bolstered the greenback's standing against almost all the world's currencies. This could create some hard-to-resist bargains.
I know investors already have a long list of things to worry about: the euro crisis, slowing economies around the world and in the U.S., and the machinations of the Federal Reserve and the European Central Bank, to name just three.
But if you're not watching the ins and outs of global currencies, you need to add this to your list.
Understanding which currencies have been rising and which have been falling will help you understand the recent performance in not just stocks and bonds but also commodities and gold.
And that currency performance will also help you pinpoint some markets that will deserve a bit of your cash not too far down the road.
The recent big move in the U.S. dollar versus almost all other global currencies -- created by the current flight to safety -- has overwhelmed longer-term fundamental trends. The rise of the dollar in the short term, I'd argue, has created some interesting bargains in the medium and longer terms, not just for currency traders but also for investors in global stocks.
An overvalued dollar -- on its fundamentals -- will, when the dust clears sufficiently, enable you to buy nondollar assets at bargain prices.
The dollar on a roll
You've undoubtedly been following the U.S. dollar, especially against the euro. That exchange rate has been a major driver of prices in the commodities market -- as the dollar has climbed, the prices of oil and other commodities in dollars has fallen, because it takes fewer of these more-valuable dollars to buy a barrel of oil. And it has been a big part of the reason for the drop in gold prices and in the value of financial assets such as European stocks priced in euros.
Even after a slight gain against the dollar on Friday, after the disappointing U.S. jobs report, the euro was down 7.6% against the dollar since the 2012 high (Feb. 28) and down 15.3% since June 7, 2011.
And that's had the effect of depressing stocks priced in euros. Certainly, a European luxury-goods stock such as LVMH Louis Vuitton Moët Hennessey (LVMUY) has its shares of worries that a European recession and slowing growth in China will reduce sales. But the dollar certainly hasn't helped. During the period from June 7, 2011, when the euro fell 15.3% against the dollar, shares of Louis Vuitton fell 16.45%.
Of course, the dollar has been climbing against more than just the euro. Many of these currencies have held up relatively well against the dollar until recently.
The Australian dollar, for example, is down 11.5% from its 2012 high (on March 1) through June 1. Its total decline against the dollar over the last year isn't a whole lot steeper, at 13.6% from its 2011 high on July 28. The big damage has come in the past month or so, with the Australian dollar falling 7% from April 30 through June 1.
Most global currencies show similar patterns of decline against the dollar, with the decline accelerating in the past few months. For example, the Brazilian real is down 24.5% against the dollar as of June 1, from its July 25, 2011, high. But more than half of that is from the 2012 high on Feb. 28. From that date through June 1, the real is off 16.9%.
The Canadian dollar, which climbed regularly from Dec. 19, 2011, to April 27, 2012 (a gain of 5.9%), has given it all back (and a bit more), with a 6.03% drop that has taken the loonie back to the levels it last saw in November.
Even the Chinese yuan has dropped against the dollar -- or to be exact, the People's Bank has let China's currency drop against the dollar. The yuan declined 0.9% against the U.S. dollar in May. Part of that is a result of a decision by the central bank to let the yuan depreciate against the dollar inside its official trading range to give Chinese exports an edge in world markets -- because they would cost less to overseas customers. (The big problem here is with the euro. Since the yuan is effectively linked to the dollar, the rise of the dollar against the euro has made Chinese exports more expensive in Europe, China's biggest export market. Letting the yuan depreciate against the dollar is a way to slow the yuan's gains against the euro.)
The yuan has also been under some pressure because the pace at which wealthy Chinese are moving money out of China has increased since the recent purge of Bo Xilai.
It's not all about the euro
Not all of the drop against the dollar has been a result of the eurozone debt crisis, which has led currency traders and portfolio managers to seek the safety of the U.S. dollar and dollar-denominated assets such as Treasurys.
Some of the drop in these currencies has been the result of negative developments in individual domestic economies. For example, the drop in the Canadian loonie comes as Canada's own economy (so closely linked to that of the United States) has slowed, increasing the odds of an interest-rate cut there by the end of this year. (By reducing what investors get paid for holding assets denominated in Canadian dollars, an interest-rate cut decreases the demand for assets denominated in Canadian dollars and thus reduces demand for Canadian dollars themselves.)
Similarly, the Brazilian economy has had difficulty gaining traction since the last round of interest-rates hikes from the Banco Central do Brasil to slow the economy and reduce inflation. On May 30, the central bank cut interest rates -- by 0.5 percentage point -- to a historic low of 8.5%. The bank has now reduced rates by a full 4 percentage points since it began cutting rates in August 2011. The Brazilian real has, by and large, followed the bank's benchmark interest rate downward.
In Australia, the central bank is expected to cut interest rates from the current 3.75% to 2.75% by the end of 2012 in order to stimulate an economy that is slowing in lockstep with softening Chinese demand for industrial commodities.
In Mexico, where the peso has declined by 12.4% against the dollar since March 13, the currency has moved down recently with data showing slowing growth in the United States and polls on the July presidential election suggesting that the left-wing Party of the Democratic Revolution is closing the gap with the centrist (but once itself left-wing) Institutional Revolutionary Party, with the right-wing National Action Party falling to a weak third place.
More from MoneyShow.com:
- Jubak on video: Buy yield with rebound potential
- Mark Skousen: 4 high yielders in the buy zone
- 6 concerns for anyone buying Facebook
Playing the currency swing
So what does all this mean to you?
I'd argue that the eurozone debt crisis has led to a global fear trade that has pushed the U.S. dollar to a higher price than is justified on the medium- and longer-term fundamentals of the U.S. budget deficit, U.S. political gridlock and U.S. economic growth. That same fear trade has pushed down the currencies of countries such as Brazil, Australia, Mexico, Canada, Chile (the Chilean peso is down 7% from May 3 to June 1), Norway (the krone is down 9.2% from Feb. 28 to June 1) and Sweden (the krona is down 9.9% from Feb. 28 to June 1) to levels that discount the better fundamentals of those economies.
At the moment that means you can use overvalued U.S. dollars to buy undervalued assets in the real, the Australian dollar, the Mexican and Chilean peso, the Canadian loonie, the Norwegian krone, the Swedish krona and other currencies.
In the long run, you will be able to add the appreciation of those currencies against the dollar to whatever gains assets in those markets record.
In a global financial market where what I've labeled the paranormal economy (see "5 rules for an X-Files market") will make 5% a year look like a great return, I don't think investors can afford to ignore this kind of potential gain from currency swings.
Eyes on the timeline
The big question, of course, is when? When will the dollar stop climbing on troubles in the eurozone? When will the global fear trade turn into a sporadic trade rather than the only trade? When will what I think are real but temporary problems in the economies of Brazil, Mexico, Canada, Chile, Norway, Sweden and Australia make the turn toward improved growth and stable interest rates?
I think I can sketch in some currency price levels that I'd like to see before I dip my toe into these trades. For example, the euro at $1.20 would get my interest (although I know there are currency analysts on Wall Street who are talking about parity between the euro and the dollar). The Australian dollar, to take another example, has support at 94.50 to 95 cents. (It finished Friday at 96.49 cents.) The consensus seems to be that the Banco Central do Brasil has stopped trying to force down the real and will even look to defend the currency near current levels.
I can also sketch in a vague calendar. I think we're looking at interest-rate cuts to draw to a close in Brazil, Canada and Australia in the third quarter. Sweden and Norway might see one more cut as the central banks in those countries try to keep their currencies from appreciating so much that they hurt exports. The U.S. presidential race will be over in November, and financial markets can begin to focus on how/whether/when the U.S. will begin to deal with its budget deficit.
All that could -- and I stress "could" -- mean that we will see global currency markets start to move away from the dollar and toward these fundamentally stronger currencies in the fourth quarter. That would mean buying the stocks of these stronger currencies markets in November or so.
The euro debt crisis is, of course, the great wild card. A true solution -- one that takes fears of a Spanish default out of market calculations -- would swing the markets against the dollar more quickly, as money managers realized they didn't have to pay up for the safety of dollar-denominated assets. On the other hand, a failure to come up with anything resembling a solution in the Greek crisis -- likely forcing Greece to default and/or leave the eurozone -- and a failure to offer Spain anything except the path currently walked by Greece, Ireland and Portugal would send the euro plunging through $1.20, and fear would push the dollar higher against all the currencies I've mentioned.
In other words, I think it's wise to wait. As much as I like this overvalued dollar/undervalued nondollar currencies trade, I don't think the risk/reward ratio is yet slanted in my favor. It's time to research what to buy -- and I'll continue to add suggestions to my watch list -- rather than to execute this strategy.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Is fear keeping us from good stocks?
- Why Jack In The Box is worth watching
- Are Spain's banks worth the risk
- Copper mining drama boosts Freeport-McMoRan
- Why McDonald's still outdoes the competition
At the time of publication, Jim Jubak did not own or control shares of any of the companies mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any stock mentioned in this column as of the end of March. Find a full list of the stocks in the fund as of the end of March here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
Stock mentioned on the previous page: LVMH Louis Vuitton Moët Hennessey (LVMUY).
More from MoneyShow.com:
VIDEO ON MSN MONEY
The American dollar is losing value daily...
As long as Ben keeps printing his funny money 7/24...
The American people need to get rid of the FED..asap...
If its not the big Oil companies driving up prices on everything, its the FED
The Dollar is not all that. It's just the only pig with lipstick on it. He does hint at that though with the 'overvaluation' mentioned in the first paragraph.
Fundamentally we suck. It's just that we suck LESS then everyone else. (Except the Chinese of course, but they are working with a rigged deck.)
Classic stock market manipulation ! Up Down Up Down ! Screw the People ! Save the (TBTF) Criminal Banking Cartel by allowing them to Rape, pillage and plunder at will ! Screw the People over and over again ! Where are Jon Corzine and Bernie Madoff ? ABOVE THE LAW ?
Perception. The Dollar is more valuable than any other currency out there. That doesn't mean it's value is something to write home about.
If the dollar is still crap at the end of the day, wouldn't it seem "so high" when everything else is crappier?
The problem no educated talking head is bothering to mention is how this impacts us Americans at home. Buy foreign? And do what? I have a house in Europe and it's going to cost a ton to get me there this summer for vacation. (Yeah, yeah... poor me.)
Well, stagnant (declining really) wages and an increasing costs of living... it's economics 101 to see a very large redistribution of wealth taking place. Who's paying attention!? Doesn't seem like many because when I say redistribution of wealth, I mean a debasement of all current wealth. Everyones made poorer. The bar is lowered in hopes that it's easier to get above it. The problem the Feds been wrestling with is whether or not they've lowered the bar to the floor. That's why their efforts anymore look futile.
Easier to pay back debt when it's worth less. This is the position the government and the Fed have taken as a remedy to our fiscal irresponsibility. Finagle the system so it's not so bad for the 'power players'. Namely the government and the 'too big to fail'.
The problem is it's a controlled redistribution of wealth... by corporate America and the big government. So while the Rich need to get much richer to enjoy the same standard, the middle class and poor are getting poorer because neither of the latter are equipped to participate in this controlled redistribution of wealth (it costs money, to make money!) So you notice the headlines about the increasing wage gap between the wealthy and everybody else. Well, duh. This is hardly a recovery. This is simply buying more time while making things worse. Not until the next generation sheds the burdens placed upon it, scrounges up something of it's own and puts it to good use... will we move on from this. The baby boomers screwed up. The headlines are dominated by the educated trying to make money now, now, now. It takes time to really make money.
Enjoy the ride!
I don't understand why the world's investors still consider the U.S. Dollar and Treasury Bonds as "safe" investments. The Fed purchased 61% of all U.S. bonds issued in 2011 to fund the rising debt with fiat currency and keep the bond prices artificially high (and yields low). It would take an impossible 76% increase in taxes to raise tax revenues from the current $2.2 Trillion to the $3.8 Trillion needed to cover the current level of deficit spending. Funding the massive deficts of the last four years with bond sales has sucked most of the liquidity out of the economy for Main Street businesses and employers.
Copyright © 2013 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Financial Information.
[BRIEFING.COM] The Russell 2000 crosssed the 1,000 level for the first time ever today and the S&P 500 established a new all-time, intraday high. Those were some of the more memorable highlights of what was an otherwise nondescript day of trading.
By and large, there just wasn't a lot of conviction on the part of either buyers or sellers. The major indices spent time on either side of the unchanged line, but never put a whole lot of distance between themselves and ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|