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According to Merrill Lynch's Richard Bernstein, the Q4 rally in stocks was deceiving. As reported by Minyanville's Kevin Depew, the 2006 Dow rally in Euros was far more subdued:

According to Bernstein, many of the recent rallies in various asset classes are a form of "money illusion." For example, the fourth quarter rally in U.S. stocks was almost entirely due to this kind of illusion. Bernstein writes that when priced in Euros the Dow peaked in October and... you might want to sit down for this... was actually down in the fourth quarter. The nearly 16% rise in the Dow last year was actually only about 4% priced in Euros, he notes.

Eh, so what, you might say. I get paid in dollars, I buy in dollars, so dollars are all I care about. That misses the point, Bernstein notes. Each dollar you get paid in buys less and less as the currency declines. Let's put it another way. Step back for a moment and think about this: when a currency declines so does ones standard of living.

Call it "the race to the bottom:" When a debtor nation reaches a perceived point of no return, they devalue their currency. Their exports become more attractive, tourists come to that country (and go shopping), the repayment of debts is done not for literally 50 cents on the dollar, but paying back with dollars that have become worth far less than they were due to the devaluation.

Bernstein is late to the party on this one: You can show any index is up or down, depending upon how you price it: Dollars, Euro, Gold. But I am not sure just how much insight pricing the Dow in dollars provides, if any.

These relative comparisons have been around for a long time. Why stop with the Euro versus the dollar? If you follow Bernstein's logic to its logical extreme, then the Dow Industrials, priced in Gold, is actually down since 1999.

As we noted last year:

chart of the day

Source: Chart of the Day

Bottom line: The big question this raises is, given these Euro based returns, will it impact the US market's ability to attract overseas investments? Other than that, the brouahaha about Euro-based returns are mostly noise...

Sources:
Do My Eyes Deceive Me?
Kevin Depew
Minaynville, Jan 05, 2007 10:42 am
http://www.minyanville.com/articles/index.php?a=11881

The Illusion of a Rising Dow
Peter Schiff
January 14, 2006
http://www.safehaven.com/showarticle.cfm?id=4432

Source: Bullish on the Dow? Everything's Relative, or Not