|Does the US Want a Devalued Dollar?|
By Prieur du Plessis OCT 19, 2009 8:15 AM
The quote du jour comes from someone who thinks so.
John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Gasoline (UGA) (+11.1%), United States Oil (USO) (+8.9%), PowerShares DB Energy (DBE) (+8.8%), and iShares S&P GSCI Commodity (GSG) (+7.4%).
On the losing side of the slate, ETFs included iShares MSCI Thailand (THD) (-6.0%), Market Vectors Solar Energy (KWT) (-2.8%), Claymore/MAC Global Solar Energy (TAN) (-2.6%), and ProShares Short MSCI Emerging Markets (EUM) (-2.5%).
Referring to the declining US dollar, the quote du jour this week comes from 85-year-old Richard Russell, author of the Dow Theory Letters. He said:
Now I'll let you in on an awful secret. The US, despite all its BS talk, really wants a lower dollar. The fact is that the US is doing absolutely nothing to defend the dollar. Of course, if the Fed wanted to defend the dollar they could halt their mass printing of dollars, and they could raise interest rates. And Bernanke could win the 800 meter race at the next Olympics at Rio.
But let's be rational -- how in God's name is the US going to pay off trillions in debt? By raising taxes? Impossible. They could renege on the debt like Argentina -- unthinkable. But there is a way -- they'll try to minimize the importance of the debt with a cheaper, devalued dollar. That's the time-honored US way, but loyal Americans don't believe it. If they did, gold would be selling at $4,000 an ounce.
It's all so smarmy, but c'mon, what do you think the Fed has been doing since World War II? It's been systematically inflating. They can't fool me, I was around after the War, and I remember prices in 1945. Maybe the chief culprit was Alan Greenspan, but Bernanke is carrying on. There’s a lot of inflating coming up. "Strong dollar policy." Bite your tongue, and give me a break.
Other news is that the Federal Deposit Insurance Corporation (FDIC) closed another bank on Friday, bringing the tally of US bank failures in 2009 to 99 (124 since the beginning of the recession). Meanwhile, CreditSights, which tracks the dismal data, predicts (via MarketWatch) that we could be no more than 10% of the way through this cycle of bank collapses, which is sure to be the worst run of closures since the Great Depression.
The major moving-average levels for the benchmark US indices, the BRIC countries, and South Africa (where I'm based) are given in the table below. With the exception of the Shanghai Composite Index, which is trading marginally below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.
The US indices are creeping closer to the so-called 50% retracement levels (i.e. regaining half the loss suffered between the October 2007 highs and March 2009 lows). The levels are: 10,346 for the Dow Jones Industrial Index and 1,121 for the S&P 500 Index.
The September highs and October lows are also given in the table as these levels could define a support area for a number of the indices.
Bill King (The King Report) said:
We regularly note that the earnings reporting season often marks the end of the market trend into earnings announcements. The reversal tends to occur during the second week [last week] of reporting. Given this is expiration week, which often creates a short-term peak on the usual manipulation, the odds favor a short-term stock market peak late this week or next week. Of course any unexpected ugly news, like negative revenue, earnings or guidance from several key companies could commence a stock downdraft.
Speaking of earnings, the third-quarter earnings season has progressed on an upbeat note since Alcoa’s (AA) results announcement on October 7 marked the onset of the reporting cycle. It's still early days in this period, but 85% of US companies have so far beaten earnings estimates. According to Bespoke, the current beat rate is well above any other quarter since at least 1998. “Even with analysts raising estimates significantly leading up to the earnings season, companies have still managed to come in better than expected so far,” they said.
Additionally, Bespoke also highlighted that while the earnings per share numbers grab the headlines, it's what companies say about future quarters that impacts equity prices most on their reporting days. As shown in the graph below, 20.3% of US companies have raised guidance so far this earnings season. Bespoke’s report said:
The highest reading for this number has barely broken 15% in any prior quarter this decade. And if we compare the percentage of companies raising guidance versus the percentage of companies lowering guidance, no other quarters come even close to this one. It will be hard to keep this up as the earnings season progresses, but it's also shaping up to be a record-breaking quarter on the positive side.
Importantly, one needs to assess what's priced in by the stock market. Useful research comes from David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, who said:
We re-ran our regressions with the latest tightening in spreads and breakout in equity valuation and found that US investment grade credit is now priced for 2.5% GDP growth in the coming year (was 2.0% two months ago) and the S&P 500 is now de facto pricing in 4.8%, which, by the way, is now basis points shy of what it was discounting in the summer/fall of 2007. And, backing out the fair-value P/E from the corporate bond market, and yields have been backing up sizably in recent weeks, we can see that the S&P 500 is now pricing in $85 of operating earnings, which we think will be, at best, a 2013 story. In other words, the rally continues to move further away from the fundamentals.
However, Rosenberg’s bearish prognostications are not universally accepted. In a rebuttal (via Clusterstock), Eddy Elfenbein created the chart below of profits as a share of GDP. “They’re clearly compressed, and if they revert to a historical standard, it means earnings have some spring in them,” said the report.
Jeremy Grantham, who has just announced his retirement as chairman of GMO, put matters into perspective in a Kiplinger article, saying:
The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip companies, where valuations are most attractive.
As stated before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I'll bide my time while the fundamentals play catch-up.
According to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com:
After improving steadily this past summer, global business sentiment has remained largely unchanged so far this fall, consistent with a global economy that is experiencing a tentative economic recovery. The recession is over but the nascent recovery is not quickly gaining traction.
Businesses remain more upbeat about the outlook into next year and broader economic conditions, and dourer when considering the strength of their sales and intentions to hire. South Americans are the most positive and North Americans generally the most negative.
As far as hard data are concerned, China’s economy gained new impetus, according to US Global Investors.
Passenger car sales in September rose 84% year on year to 1.02 million units. Housing starts jumped 56% in September from a year earlier, the fastest pace of growth in at least five years.
China’s exports declined 15.2% year on year in September, the smallest contraction in nine months, while imports dropped only 3.5% year on year as the domestic economy continued to recover. Exports rose 7.7% on a month-on-month basis, adjusted for seasonality.
The stronger export performance follows a similar trend in South Korea, Taiwan and Vietnam.
According to the Financial Times:
Singapore, which led Asia into recession, on Monday pointed the way to further regional recovery with strong third-quarter economic growth ... The Monetary Authority of Singapore (MAS) said GDP expanded 14.9% on a seasonally adjusted quarter-on-quarter annualized basis in the June to September period, after a comparable revised increase of 22% the previous quarter.
A snapshot of the week’s US economic reports is provided below.
Further good news on the global economic front came from Eurozone industrial production that expanded for the fourth month in a row in August. Output rose by 0.9% from July, when it increased by a revised 0.2%.