Jeff Saut: Don't Worry About the Dollar!
Stocks will go up enough to offset the declining greenback.
Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.
Back in the mid-1970s, when I was just a "pup" in this business, I went to one of my mentors and said, "Lucien, it looks to me as if the dollar is going to go down. Should I be worried about stocks if that happens?"
Lucien Hooper, sitting behind his desk, lowered the Wall Street Journal just enough so that I could see his eyes and said, "Don't worry about the declining dollar because stocks will go up enough to offset it!" Sure enough, the 28% decline in the US dollar was offset by a 30% rise in the S&P 500. And that appears to be what's happening again as the US Dollar Index broke to new reaction "lows" the first part of last week (basis the December Future) and stocks rallied. Worth mentioning is that despite the media's "beating of the dollar like a rented mule," the Dollar Index still resides above the "lows" made back in the spring and summer of 2008.
Nevertheless, the dollar's weakness has clearly been very positive for my firm's "stuff stocks" (precious/base-metals, agriculture, energy, cement, timber, etc.), as well as stocks in general, and we've been bullish. Most recently, we've suggested, "that with credit spreads below their pre-Lehman bankruptcy levels there should be no reason why the equity markets can't 'fill up' the downside vacuum created in the charts by said bankruptcy, as can be seen in the following charts. That gives the S&P 500 an upside target of 1200-1250."
One admittedly very bright Canada-based strategist, however, took exception to my statement in last week's Barron's magazine. The only problem was, he got my quote wrong. As reprised:
Picking up on a pronouncement by a chief investment officer of an investment firm that "we're still at levels that are lower than we were before Lehman Brothers [went belly-up]. We're vastly better off than we were then." After stating a bunch of economic statistics that are worse now than back then he concluded, "If this is 'vastly better off,' (I) shudder to think what 'worst off' would look like."
Now, I don't mind ANYONE disagreeing with me. That's what makes a market. But, at least get the quote right! I said nothing about the economy and certainly didn't suggest that the environment is "vastly better now than it was then." The word "vastly" is particularly disturbing to me because it was never used, which caused one savvy seer to remark, "Why should you be upset by a strategist that completely missed the March lows and has hence been bearish all the way up?!" Of course, while people that live in "glass houses" (like me) should never "throw stones," if that strategist wants to debate the economy I offer the following.
To begin, clearly all is not well with the economy. Yet, statistics on industrial production, jobless claims, leading indicators, Philly Fed reports, etc. all show that the signs of recovery remain in place. In many cases, however, select pundits focus on the idea that some of the numbers aren't as strong as expected.
While that may be true, my firm is far more interested in the underlying trends. For example, industrial production bottomed about a year ago and has been positive for the past seven months. Meanwhile, jobless claims topped out last spring and have been trending lower ever since. Moreover, the recent Philly Fed number showed the strongest reading since the recession began; and, it showed that inventories continued to shrink. With inventories plumbing record lows, there's little doubt corporate America will begin to replenish them.
Indeed, John Chambers, the CEO of Cisco (CSCO), recently remarked, "The numbers are indicating that we are in the early, initial phase of a recovery -- with the US leading the way. The number for US enterprise orders was dramatic. I think we are entering a period very similar to 1997 to 2004 where you will see a decade run of productivity increases."
In past missives, my firm has stated that this recession was an anomaly since it was the first time productivity soared. Clearly, that productivity "hop" was because corporate America cut costs dramatically. Since corporate revenues were hampered by unemployment, a reticent consumer, limited bank lending, etc., companies turned to the only thing under their control: cost-cutting. The result caused productivity to catapult. Therefore, any pick-up in final demand falls straight to the profit line of corporate America.
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