| MARKET ROUNDUP | |
| Dow | -28.32 to 17,042.90 |
| S&P 500 | -5.51 to 1,972.29 |
| Nasdaq | -12.46 to 4,493.39 |
| 10-YR Yield | +0.02 to 2.51% |
| Gold | -7.10 to 1,214.50 |
| Crude Oil | -$2.94 to $89.83 |
Stocks may be bouncing around like a rubber ball. But foreign currencies? They’re heading one way — SOUTH — and in a hurry!
The Japanese yen is plunging. The euro is plunging. The Canadian dollar is falling, and so is the Australian dollar. Heck, even that plucky New Zealand currency affectionately known as the “kiwi” is tanking!
So what the holy heck is going on?
First, the U.S. economy is outshining many other major economies around the world. I know, I know. This isn’t a 1980s or 1990s style boom. Job growth can and should be better, and excessive regulation and asinine tax policy are holding growth back.
But a broad range of indicators looks better here than they do overseas. Just to pick one: GDP expanded at a 4.6 percent rate here in the second quarter. That was the fastest since 2011. In Japan? It shrank a whopping 7.1 percent. Euro-zone GDP came in at 0 percent. A big, fat goose egg.
Second, foreign central banks are actively trying to devalue their currencies. The Bank of Japan is printing gobs of yen and buying assets willy-nilly. The European Central Bank is buying asset backed securities and other bonds, and is close to pulling the trigger on unsterilized QE that includes government debt.
Then this week the Reserve Bank of New Zealand announced that it dumped 521 million kiwis — about $404 million — in August. That was the largest currency market intervention since 2007, and it was designed to weaken the kiwi substantially. It fell to a 14-month low in response.
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| The largest currency intervention since 2007 pushed the kiwi down to a 14-month low. |
Third, while many on Wall Street don’t want to hear it, the U.S. Fed IS moving toward tighter policy. It’s a fact, not an opinion. It has already slashed QE to $15 billion from $85 billion, and it’s on track to eliminate it entirely next month.
That’s a form of tightening plain and simple. What’s more, it’s being accompanied by a steady erosion in the price of Eurodollar futures.
You probably know what those are by now since I’ve mentioned them multiple times before. But simply put, they track expectations about the future direction of Fed policy. The more they fall in price, the more it signifies that investors are pricing in more Fed hikes, sooner Fed hikes, or some combination of both.
So what does this all mean for stocks? Well, the plunge in foreign currencies is bad news if you own foreign stocks. That’s because every yen, euro, kiwi, or what-have-you that you invest in them is worth fewer dollars when you repatriate the money.
So even if the stock you own remains completely flat in its home market, you will lose money — in dollar terms — on your investment. Even if you invest in dollar-based, U.S.-traded mutual funds or ETFs that track foreign markets, those negative currency translation impacts will get captured in the price of your shares. That’s one reason why, for instance, the iShares Europe ETF (IEV) is down around 2 percent year-to-date versus the 8.5 percent gain in the SDPR S&P 500 ETF (SPY).
U.S. multinationals may face currency-related earnings shortfalls, too. That’s because every yen or euro or what-have-you that they earn overseas also translates into fewer dollars at reporting time. The rising dollar can also put pressure on what I like to call “monetary commodities” — gold, silver, and so on. So while I still love gold for the long-term, I’m not surprised it’s struggling in the here and now.
But if you’re focused on U.S.-focused companies in U.S.-focused industries … like domestic energy, health care, select financials, steel, and so on … you can still generate nice returns for yourself. So that’s where I am focused — still — and that’s where I think you should be too.
Oh and if you took my advice and bought anti-euro investments, this may be a good time to take some profits off the table. I say that only because we’ve come so far, so fast and could see a short-term bounce.
| “If you took my advice and bought anti-euro investments, this may be a good time to take some profits off the table.” |
But I wouldn’t be surprised to see the euro fall to 1.20 against the dollar over time — and possibly as low as PARITY (meaning 1 euro only buys 1 dollar) even farther out in the future.
So how closely do you watch the currency markets? Are you following these moves I’m pointing out — or better yet, are you profiting from them? What do you think will happen to the dollar over the longer term?
And what will it mean for U.S. multinationals or other stocks? Can the market hold up, or even prosper, as foreign currencies tank? Or will the pressure be too much for stocks to bear? Share your thoughts and ideas by clicking here.
| Our Readers Speak |
Several of you weighed in on the stock market and the movements we’ve seen in the euro lately, so I wanted to tackle those comments today.
Reader Anthony G. said: “Bad choices and actions by politicians all over the world have the economy in a bad condition. The masses feel hopeless. The global economy will slow as a result.”
Plus, Reader Donald L. said: “I recall a number of years ago when the euro reached $ parity. The world did not end and a few, very few, beneficial changes were made to EU monetary policy and some pious mutterings about fiscal change that lasted about as long as effective European ‘unity.’
“We should simply resign ourselves to having a weak trading partner and use the whole thing as an example of something to avoid at home.”
But Reader Fred thinks we could see at least a short-term trend change soon. His comments: “The euro is way oversold. Look at a chart. Maybe a few more ticks but that should be about it. Should see a rally for a while and then it will start heading back down again.”
It’s not very often I agree with two different people on two different sides of the same debate! But this is one case. Yes, the euro is deeply oversold and due for a short-term bounce, Fred. But yes, Donald, I also believe that ultimately the euro could be headed back to parity given the different economic and policy tracks the U.S. and Europe are on.
Finally, Reader Rosalindr had the following to say about the stock market here: “After years of trying to chase the market and hitting that million dollar jackpot, I have finally grown wise in my old age and buy only solid companies with good dividends. No more speculation. I love boring stocks.”
Nothing wrong with boring, Rosalindr! Some of my best winners have been in safe, supposedly “boring” stocks. They can deliver great returns over time!
Don’t forget — this a great place to share your thoughts and insights with me and other investors. Do so by clicking here.
| Other Developments of the Day |
• eBay (EBAY, Weiss Ratings: C) is finally bowing to investor pressure and planning to split out its PayPal payments business. The online auction firm bought PayPal for $1.5 billion in 2002, but the two companies will trade independently starting next year. eBay shares surged on the news.
• Protests in Hong Kong continue to grab the attention of investors worldwide. They’re waiting to see whether this turns into another ugly battle between protestors and the government like we saw in Greece a few years ago … or if the protestors and the Chinese government pull back from the brink.
• We get some heavy-hitting economic data later this week in the form of the national ISM reading on manufacturing and the September payrolls report. But in the meantime, we got a softer reading on home prices from S&P/Case-Shiller (up 6.7 percent YOY vs. a forecast of 7.4 percent) and an ever-so-slightly softer Chicago PMI reading on regional manufacturing (60.5 vs. a forecast of 61.5).
As for consumer confidence, the Conference Board’s main index fell to 86 in September from 92.4 in August. That was worse than the average forecast of 92.
• The ruble is another currency whose value is collapsing, for different reasons than the ones I mentioned earlier. President Vladimir Putin’s sabre-rattling is driving foreign capital away. Anti-Putin sanctions are also harming the economy, giving foreign investors and Russian citizens another reason to dump rubles and ruble-based investments.
That’s reportedly forcing the Russian central bank to consider temporary capital controls. Some $100 billion has fled Russia so far in 2014, driving the ruble to a record low against a basket of foreign currencies.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 26 comments }
Mike I understand what you’re saying however it seems based upon acceptance of US government information. So when you quote a US GDP growth of 4.6% it doesn’t address the fact that the US redefined how they measure GDP. When you quote employment you don’t countenance the Shadow Stats numbers showing unemployment of north of 20%. You speak of tapering but the actual growth of money supply in the US is huge so they may just be burying the QE somewhere else. It seems to me that a country with almost 50 million people on food stamps isn’t truly a growing economy. Although other countries may be disasters economically it seems the figures they quote are a bit more accurate, at least that is the information I’ve been told. Money and credit are clearly misplaced world wide. I can’t disagree that the US dollar is rising but it seems to me to be fear of the other currencies and not performance of the US economy. The people I talk to in the US aren’t bullish on how well the economy is performing.
James
I agree. Firstly the $US is the least dirty shirt in the laundry at the moment. Secondly, the figures we are given, aren’t as reliable as they use to be. Thirdly with currency wars and QE, what is going to happen to the enormous pile of debt as interest rates change. We are suppose to navigate this mine field with unreliable information. I still believe that the central banks aren’t going to let this fall apart until they are safely out of their weak positions, then into secure investments and the punters are left holding the bag.
Mike Larson, are you serious parroting govt. lying numbers? How do we know they are lying because “their lips are moving.” Have you seen John Williams work on what’s really happening in the economy? The only reason the US dollar is up is because of the weakness of the others. For Pete’s sake get a grip and at least give people what’s really happening. Your credibility takes another hit each time you tout recovery in the US. It’s not happening.
Iwonder,has anyone considered outcome of a weak Euro nations on gold price? Also, when the dollar goes up, will someone please explain why gold goes down? There is no peg to the dollar? Or, perhaps I missed that?
The government has a secret program with the Chinese to sell the gold for super cheep prices so they wont dump the T-bills, its all rigged.
Dennis
The gold price is just measured in $US and will remain weak or out of favour until the movers and shakers like GS and others, decide that there is money to be made in it again. There are enough bears out there still talking down gold until it is cheap enough to talk up again.
As I see it,forget advice its your money,now the $ and only the $ has lipstick,everybody is piling in to save their own savings worldwide,$ goes up,gold goes down.Now the question is for how long.Nobody knows,but when the $ starts going down, grab every commodity you can,and start making money.renember the word INVERSE but be quick and be nimble. A THE BEST
ian has a good point there. The trouble is, since the buck, like all currencies now, is backed by NOTHING! “Full faith and credit…” – that is nothing except the words of a politician. We all know what a politician’s promises are worth – nothing, right? But we have let ourselves value everything in worthless bucks, so even hard assets are only worth something if they contribute to the survival of ourselves and our families. Maybe the “survivalists are correct. Overpopulation may soon be no worry at all to humans.
Mike, GDP is useless economic indicator since the Government changed how it is calculated.
The US Government financial data reporting amounts to feel good propaganda.
Larry Edilson’s statement that the MSM claims the US is in a recovery is just a “mirage,” appears to be correct.
The money printing by the central banks will not produce capital goods. It will only produce more debt and lead to war and suffering in the world.
Government intervention leads to economic madness not prosperity.
So if this is the case, what about China, Vietnam, Indonesia and other Asian countries
is their currency devaluing or revaluing while all this is happening. what about the Australian dollar??
The ruble is another currency whose value is collapsing, for different reasons than the ones I mentioned earlier.
In English language you need to say thus:
The ruble is another currency whose value is collapsing, for reasons different from the ones I mentioned earlier.
A theme that will play out repeatedly in the future is “Living WITHIN means has no limits but living BEYOND means has limits”.
Even though USD is going up against most currencies, one should view that change as one currency being weaker than another.
US government + Fed on a consolidated basis are living beyond means. Deficits continue to massive. US as a nation has the LARGEST trade deficit amongst all nations. It is therefore, unlikely that USD will continue its march upwards against other currencies. It is better to trust something (like gold) whose supply does not go up as fast.
know something happen to you is the best strategy to move forward or avoid your risk
A fairly even handed explanation of the dollar/ other currencies and the re-balancing of the gold supply worldwide currently underway is found in Rikards’ latest “The Death of Money”.
What we have here is the final bubble of this decade. We’re near the very top of the roller coaster.
The fed may have reduce QE~# to $15billion, but they put over $400billion on the banks balance sheets yesterday morning via reverse repos priced at -0.2 to 0%. Some taper, eh?
http://www.zerohedge.com/news/2014-09-30/what-just-happened-todays-crazy-and-biggest-ever-window-dressing-reverse-repo
I got in to EUO a while back because I saw that Mr Daghi was dead set on causing inflation in the European Union. I made about 12% on that bet.
He is following the practice or our past, as well as current, FED chairperson. He will do whatever it takes to cause 2% inflation. Some called ours the “Bernanki asset bubble”. Mr Draghi’s work in Europe is being called the “Draghi asset bubble”.
Enough of that. I got out of EUO, as it is now common knowledge what is going on. EUO has continued to climb. But, I figure it will level off pretty soon. I see the big gains as having been made!
Jack
OK yankee,I could agree or argue with you about EUO where can people put their money?.I reco keep holding with a tight stop.After all a trend is a trend and the EUO and its still way above its 10 day ema.Me Im still in till I get a nasty candle.You missed a nice pop on Friday.be nimble and watch out for a doji,or something
I would think that owning a stock that pays a good dividend should hold value no matter what happens to the value of the US Dollar. The stock represents ownership of the assets of a company that owns income producing facilities and resources. Even if the US Dollar becomes worthless and the Government has to issue some other currency to take its place the stock I own should have value in the new currency or gold & silver. Am I missing something here? Please elaborate.
Brazilian Real; I know Martin has a lot of understanding of the financial conditions in Brazil. Does he believe there is more of a chance of devaluation of the Brazilian Real than there is of the US Dollar?
As ignorant as it sounds. I beleive A strong dollar is a good thing. I would like to be able to buy into good global companies at a discount. We are about to produce more oil than Saduia Ariabia. We are the king of the world for another generation, maybe two. I kept thinking we are Japan now. We will suffer the same fate. We are not, we are better. Our kids may be able to buy cheap cars from japan and cheap crap from china for another generation. Our prosperity will ignight the prosperity of the world. As dark as things seem now, I believe things are about to pop big time. 2 years tops when we can get rid of this current administration. Japan should be so lucky if Mexican people would invade their country. They need the body’s to pay for there old to retire. Most are very hard working. They need to be educated. I worry of our debt. however with a stronger dollar we could afford to start buying it back, there won’t be many sellers. Things are much bettter than they look. I feel bad for dumping 17 trillion upon my kids, however I’m sure they will dump 34 trillion on theirs. In this land you don’t even have to have the kids, people come here for you. I think of all the oil drilled in the United States, most people don’t invest, They don’t even get ten cents from the Balken Shale oil taken from their country. Maybe 1/2 of a percent of oil companys current taxes should be into paying off the 17 trillion in like a lock box thing. I know things look bad, and they are. Things are about to go from unbearible to great. Babyboomer’s are dropping like flies, struggling kids are getting enough to pay off debts. Things are on the cusp of getting great. If you got a 401K go to cash. and go all back in in 1 1/2 years. Current things are not good, however shieks from Sadiua in the 90’s could be you. So much money from oil will be us. Everyone will hate us for our prosperity. And we will have the money to blow them up. It won’t be today however this country is about to rise from the ashes. Bet on our dollar. Bet on our country. Doom and gloom, that’s correct today. Things are about to change. For the better. Not yet, but very soon. Look forward to the positive. It’s coming. Unless you are old. Then you are screwed. Kiss ass to your kids. They may be your knew Dad. Now I don’t even understand what I’m talking about so bye for now.
Hi MARK,That was a book,but get down from your horse a minute,You may think your better than everybody else,but don’t you think some Japs are pulling their hair out with their Gov.decisions and Americans doing the same thing,our leaders could not organize a piss up in a pub.Have any of our leader(hate that word) ever run a business.I doubt it
Interesting that the stock markets fell from 2000-2008 along with the dollar. Then the stock markets has rallied along with the dollar from 2009 to the present…… Almost makes you want to believe, that indeed, there is a correlation as to which party holds the Presidential Office and the stock markets performance along with confidence in the dollar! … :) How could Karl Rove have been so wrong?
The Euro currency was rolled out at parity to the Dollar in 1998, or when ever, and it quickly sank to 80 cents. Does anyone remember this at all?
Commentator Mike writes: ‘Bad choices and actions by politicians around the world….’
Just what beneficial alternative choices could they have made which would not have impoverished 75% of their nations’ citizens and completely destroyed all pension fund
holdings?