Like the prodigal son, U.S. dollars are about to return home. At the turn of the millenium, the dollar traded nearly at parity to the euro (1.0368€ to US $1.00). At the same time, the S&P 500 was trading at historic high levels (1,498). Today, eight years later, the dollar has declined to nearly two-thirds (0.68€ to US $1.00) of the value where it traded against the euro in early 2000. On Friday, the S&P 500 closed at 1,325, down 11.4% from the high made in early 2000. At the beginning of 2000, S&P 500 had just posted earnings for the prior year of $46. Since early 2000, S&P earnings have risen 89% (11 percent per annum on average) to $87. Euro investors can now purchase a dollar of earnings for 70% less than they could eight years ago. For holders of euros, our domestic stock markets are a steal. There is a fire sale on anything made, listed and owned in America.
Potentially, more staggering than those figures is the fact that the current account balance now stands at nearly $1 trillion as of 2007 (according to CIA World Factbook in 2006 CAB was $880 billion). In 2000, it ended the year at $475 billion. It has risen steadily each year. That’s a lot of dollars sloshing around the world. Many of those dollars have been converted into other forms of currency such as gold and forex. As well, many are held as bank reserves at the Fed and are invested in US Treasuries. U.S. dollars held for the account of foreigners are primarily dollars held for nations that peg their currency to the U.S. dollar (primarily China and Japan). As the Chinese become comfortable with owning long-term assets (bonds and equities) in the U.S., and with declining short-term rates, the Chinese will begin to reduce their holdings in short-term treasury investments and seek better returns in the U.S. stock and bond markets. After the U.S. invasion of Iraq, Europeans all but abandoned investment in the U.S. With a change in the administration, and potentially political parties, it is likely that Europeans will not be able to resist the phenomenal values in the U.S. market. In addition to capital asset acquisitions, the lure of “Made in America” will be irresistable to foreigners. As a result of the depreciation of the dollar, foreigners will look to purchase goods from America spurring a boom in demand and growth in earnings staving any downturn in the U.S. economy. Additionally, large firms with global exposure are taking a fresh look at the U.S. as an attractive location for new facilities.
Peter S. Goodman and Louise Story wrote this week in the Sunday edition of the New York Times that overseas investors are buying aggressively in the U.S. “The weak dollar has made American companies and properties cheaper in global terms, particularly for European and Canadian buyers. Even as Americans confront the prospect of a recession, economic growth remains strong worldwide, endowing oil producers like Saudi Arabia and Russia and export powers like China and Germany with abundant cash.”
What does this mean for investors and the financial markets? It would appear as if U.S. securities have become the global “value-play”. If you’re a value investor, you need look no further than the U.S. Get ready to welcome home those dollars.