The financial markets stumbled a few weeks ago but are now making another comeback. In fact, they are looking to continue higher as they may be breaking out of their trading range.
Corporate profits for the most part have beaten analyst's expectations for the second quarter. Sales, however, have been down but not down as much as expected. Good news continues to abound as the world struggles to emerge from the longest recession in many years.
There are continuing signs of weakness in the housing market, job market and the commercial real estate market. Most of this has been blown off by many investors who are expecting a "jobless recovery." For the life of me, I have absolutely no idea how we can recover without people going back to work. But then again, I am not an economist nor am I savvy enough to figure what others are apparently seeing. Nonetheless, we continue to worry about the future.
Wall Street typically looks 6-9 months in the future as a basis for investment decisions. When we look out that far, we do not see company earnings increasing at a sustainable rate. In other words, we think that earnings will remain flat as long as consumers are faced with the uncertainty of their homes and jobs. We think long term investors and institutions are seeing what we see and are expressing skepticism going forward.
So what is holding things up? The answer: the U.S. dollar. The whole world has become a de facto currency trading machine, unlike anything we have seen before. In fact, this whole year has most investors scratching their heads. The dollar has become the hated and reviled currency. Investors are jumping on the cheap interest rates to borrow in dollars and invest in risky assets. This is forcing stock prices up. This is also driving gold and commodity prices skyward as well. The Fed is buying up bonds and keeping bond yields down. This tends to force money out of low yielding money market funds into risky assets.
The dollar has become such an obsession (as so deemed by USA Today) that all trades are effectively based on what the dollar is doing. Strong dollar days find the markets dropping while weak dollar days send the stock market to the stratosphere. There are murmurs on the street that the dollar is in a bubble and that the end result could be ugly. One must ask why a weak dollar is so good for America. In past years, the stock market would be roiled if the dollar was weaker. Today, investors around the world are celebrating!
Companies that export to the rest of the world (think Coke and Intel among others) are thriving because of the weak dollar. This is because U.S. goods cost foreigners less to purchase leading to stronger demand for our goods and services. Of course, foreigners are upset because that is stifling their own exports. The Eurozone has complained that the weak dollar is leaving them at a tremendous disadvantage. So far, they are only complaining. In Asia, they are aggressively buying U.S. dollars to prop the value and keep from having exports suffer.
Our government and Fed have been warned by many countries but those pleas are falling on deaf ears. By encouraging a weak dollar, the Fed hopes to do the following: 1) help the exporters, 2) help them pay off their debts with cheaper dollars and 3) keep interest rates low and stimulate the recovery. This has the majority of economists cheering the move but some economists are not so convinced. While it may help us, it could spur more tariffs and an anti-American attitude, both of which could actually hurt us more than it helps.
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The dollar play is really a bet on the global recovery. If one believes in the global recovery then it makes sense to sell dollars and buy risky assets. Recently the International Monetary Fund (IMF) said the dollar was overvalued. That alone has fueled the stock market and commodity market in the past week.
We concur. We believe that the dollar will continue to weaken based on our historically low interest rates, our profligate and uncontrolled spending and our desire to continue to borrow ever increasing amounts of money as we spend our way to prosperity! Other nations have warned that we need to curtail spending and borrowing but the Treasury just announced that we are on pace for a $2 trillion dollar deficit this year. That follows the record setting year of 2008 which was $1.4 trillion. That amounts to a whopping, unparalleled increase of over 42% in just one year!
Last week, we moved accounts to reflect the weakening dollar. The only thing that will have any substantial adverse impact is if the global economy starts to falter. If that happens, the world runs to the dollar and bids up the prices which will put the brakes on our own domestic stock market. For now, that is probably a few months away before we see any indications of a stronger dollar.
Also, the three month period of November, December and January are historically the best months of the year. Analysts are projecting a decent holiday season which is propping up the mood of the market. When earnings are released in January, it will be interesting to see if we truly are working our way to recovery.
Below are the positions for the three Dynamic Allocation Strategies. The Fixed Income Strategy remains the same.
Conservative Strategy:
EEB: Brazil, Russia, China, India Fund-- 5%
TIP: Treasury Inflation Protected Bonds--20%
GDX: Gold mining stocks-- 5%
DBC: Commodity fund-- 5%
GLD: Gold-- 10%
JNK: High Yield bonds 15%
TEI: Templeton Emerging market bonds-- 5%
VEU: Vanguard All World fund-- 5%
BSV: Vanguard Short Term bonds-- 30%
Moderate Strategy:
Cash 10%
EEB: Brazil, Russia, China, India Fund-- 5%
GDX: Gold mining stocks-- 5%
DBC: Commodity fund-- 10%
GLD: Gold-- 10%
JNK: High Yield bonds 15%
TEI: Templeton Emerging market bonds-- 5%
VEU: Vanguard All World fund-- 10%
BSV: Vanguard Short Term bonds-- 30%
Aggressive Strategy:
EEB: Brazil, Russia, China, India Fund-- 10%
GDX: Gold mining stocks-- 10%
DBC: Commodity fund-- 15%
GLD: Gold-- 20%
JNK: High Yield bonds 15%
TEI: Templeton Emerging market bonds-- 10%
VEU: Vanguard All World fund-- 20%
By: Robert M. Vance, MS, ChFC, CLU, CFP®
© Vance Capital Management, LLC |
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