'Dollar Up Stocks Down' Will Likely Change Soon 13 comments
- Roger Nusbaum's articles on Seeking Alpha
- Email Roger
- Follow Me on Twitter Roger's blog: Roger's wealth management firm:
-
Font Size:
-
Print
- TweetThis
Short post today.
The media paid a lot of attention to several things Friday. The huge move up in the fear gauge, aka the VIX. Dollar up means stocks down. 1042 is a very important number for the S&P 500.
All of these things are very, very important. Unless they're not.
The VIX's importance ebbs and flows. Sometimes it is important but sometimes it's not. It is not clear to me that the best application of VIX is as a coincident indicator, i.e. VIX is up a lot so stocks are down.
For now, there does seem to be something to 'dollar up stocks down'. If concerns about the greenback come to fruition (perhaps it makes more sense to say play out further) then this relationship should be expected to change. The bigger picture I have been working with has been the US as a less attractive investment destination than other countries. If this turns out to be correct then the dollar will go down slowly and stocks will go up most of the time (but less than many other markets). The point here is that 'dollar up stocks down' will likely change soon.
If you think of yourself as an investor, as opposed to a trader, then 1042 means nothing. Whether the market goes up or down from here, investors should take solace that the US capital markets are not permanently broken. At current levels, the SPX (SPY) is about 400 points from the low and 500 points from the high - sort of in the middle. In that context, if you believe that the US markets will function, does it matter if the next 100 SPX points are up or down?
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 13 comments:
It is the stirrings of the old shadow banking system playing with a newly invigorated carry trade - now using the dollar as well as the yen as the funding currency - that is likely to lead to a continuing strong correlation between global equity performance and the appetite for emerging market assets, Australian dollars and certain commodities.
"All of these things are very, very important. Unless they're not."
That would seem to be an axiom that applies to much of the data we analyze. Separating the media noise from the truly significant seems to be a never ending battle.
We have a lot of deflationary pressures, including lack of credit, falling house prices, high unemployment, and of course the most important reason, the need to sell treasury bonds and scare the sheeple out of stocks into bonds. There are so many bonds that Bernanke will tank stocks in order to sell bonds: seekingalpha.com/insta...
++++++++++++++++++++++...
An absurd statement. Every investor in the world, including Warren Buffet, is looking for attractive entry prices. What investor would want 1042 entry prices when 800 or 900 entry prices may well be available somewhere in the relatively near future.
You are welcome to your opinion and to "invest" your own money based on it, but a large number investors think US equites are significantly overvalued at these levels. Time will tell, but put us in camp of patient investors waiting for much better equity prices before being willing to put any money in the US markets.
The government is suppose to be a referee to make sure that the rules are followed. It decided that it wanted to be a player, and now it wants to decide who wins and who loses on very large scales. Unless you know what the government is going to do, you aren't an investor at any level of the S&P.
I agree with Roger, it really does not matter much to an investor who is inherently focused on individual securities whether or not the broad market is under-valued or over-valued. What matters is whether you are purchasing those individual securties at suffiently attractive valuation in order to give yourself the opportunity to generate exceptional returns over the next 3-5 years. I often hear people talking about the "lost decade" for stocks based upon the returns of the indices. However, it is not very difficult at all to find companies whose stocks are up 400, 500 and even 1000 percent over the last 10 years. Gaming the market is for traders in my opinion. Investors need something to value and that is much easier to do with individual companies as opposed to the broad market.
Equities Generally Drive the USD and Other Currencies , Not Vice Versa
Here's an important point to clarify. Over the past week, there seems to be a common notion in the media (check out Yahoo Finance's weekly recap- I believe from briefing.com) that a rising USD was driving stocks lower. We disagree strongly, and suggest that such analysts were simply casting about for an explanation other than the one supported by far more evidence-that the current rally is overbought and due for at least a correction if not reversal.
In fact, most of the time the opposite is true- in the short term stocks drive the USD (and currency trade in general). While currency trends can and do affect equity markets, that influence tends to be more gradual, whereas stock market movements tend to have immediate impact on currency markets. Much of the reason for this is that 80% of currency trading is speculative, mostly very short term. Equities tend to be held for longer periods.
When Stock Markets Are Optimistic, Currency Traders Sell Dollars
Why? Global stocks, arguably best represented by the S&P 500, are widely believed to be the best barometer of optimism about growth prospects, aka risk appetite, or pessimism, aka risk aversion.
When there is risk appetite, traders buy currencies that tend to rise when there is growth (for a variety of reasons, but mostly because these offer the highest short term yields). These are referred to as risk currencies, the main ones being the AUD, NZD, EUR, and CAD).
When Stocks Markets Retreat, Currency Traders Buy Dollars (also JPY and CHF)
When there is fear or risk aversion, the risk currencies are sold and traders buy currencies that tend to rise in times of fear. This group is known as the safe-haven currencies. The USD has, over the past few years, generally been the #2 most in-demand safe haven currency, after the #1 JPY, though in some ways it's becoming the #1 safe haven currency.
These Labels Refer to Market Behavior Only, Not Fundamental Store of Value Safety
Understand that these labels do NOT at all mean that one currency is actually a better or less reliable store of value than another, indeed some of the "risk" currencies have much better fundamentals than the safe havens, and are backed by far healthier banking systems that are largely unburdened with bad debt, unlike the USD.
Rather this nomenclature simply refers to how the currencies behave in times of optimism of pessimism.
Because risk and safety assets tend to move in opposite directions at the same, which asset influences which is not always clear to casual observers. To further complicate matters the roles do at times briefly shift, and the primary forces that drive a given currency price can and do change over time.
Appreciating Currencies Affect Their Economies Over a Longer Period Than Stocks Affect Currencies
Short term currency moves thus generally have little short term influence on stocks, whereas short term stock market movements have immediate influence on currency pair prices.
In the long run, a rising currency clearly can hinder economic growth by making a country's exports more expensive, and thus can weigh on stock prices WHEN it becomes clear that the appreciating currency is hindering export growth. That, however, takes time, though on a given day analysts seeking an excuse for stock movements will blame currencies. Often that is misguided.
This is true for all economies to varying degrees, though in fact far less so for the USD, since most of US GDP is from consumer spending, NOT exports. As a net importer, when the US economy is healthy and importing, the US economy reaps benefits, especially in the short term, from a strong USD because the imports become cheaper.
Why is the USD a Safe Haven Currency?
However, most currency trade is from very short term speculative traders, and in the short run, they look to the direction of stocks to decide whether to go long or short on the risk currencies or safety currencies.
Since the current downturn began, the USD started trading as a safe-haven currency, i.e. one that traders buy ONLY in times of rising fear. Without getting too much into the technicalities of why this is the case (like that it's used as a funding currency of carry trades) suffice to say that it behaves this way due to the USD's poor fundamentals, including:
• Low income: yield low short term yields that are likely to be among the last among the major currencies to rise, thus one gets very low returns from holding low risk USD debt
• Low chance of capital gains due to (at least perceived) ballooning supply that is widely believed to virtually guarantee inflation/devaluation), thus making the USD a poor holding for capital appreciation
Thus the only reason to hold the USD is that these days it DOES usually behave as a safe haven currency, meaning that it rises when there is risk aversion and falls when there is risk appetite. Because stocks are currently seen by currency traders as the prime barometer of risk appetite, the safe-haven USD falls when stocks rise and vice versa when they come in.