Monday
Nov272006
Currency Down Market Up. Monday's Move Is Not Normal For The Medium Term
November 27, 2006 at 4:27 PM
The US dollar declines and the US market is down. This is the exact opposite of usual medium term effects that occur when currencies move.
The Neubert Experience:
I was trading Mexican equity derivatives in 1994 during the Peso currency crisis, I was trading Brazil (equities, futures and bonds) during many of their currency crises in the 1990's. I was trading emerging market debt in 1992 when the UK Pound broke from the ERM and fell. In every case, where these currencies fell the local stock market indices were up relatively quickly.
Why do do markets go up when currencies fall?
1. Exporters are looking to make more money
2. All assets look cheaper for foreigners relative to their own stock markets so they can buy
3. A falling currency often means good news for pricing power of domestic companies as foreign products (denominated in a foreign currency) go up.
4. In general, a falling currency means inflation for end product prices but not necessarily of product inputs. Inflation, while it may mean higher interest rates, almost always means better pricing power for corporates. (this is a little related to point #3).
So why is the US market down today as the dollar hits recent lows?
Even though Since the 80's Republican governments (Regan and Bush Jr. ) like to borrow and spend like a the Latin American Economic Disaster Governments of the 70's and 80's the US is still not yet treated as a third world country by the rest of the world. But, because the short term reaction is over a short term lack of confidence in the US - foreigners sell stocks and the dollars they used to buy them in the first place. This is a very short term view - and both the market decline and currency decline have both been quite small so far. The market is down Monday because it's is falling under its own weight created by the recent run up. The recent decline in the dollar is just the short term excuse. If the dollar were to really drop, watch out for an increase in the US stock market indices. The US is not suffering from an overall global crisis of confidence. If it was, we'd see long term interest rates skyrocketing - and we are not.
Disclosures and Confessions: I am painfully short US bonds and betting on an increase in long term interest rates. I am long Yen vs. Short USD. I try to diversify my portfolio not just by sector but also by currency and country. I do not believe I (or anyone) should have all their assets in US equities. I also like and own US equities that benefit from a dollar decline. If you've been reading this column for a while you know which equities those are.
Disclaimer: Nothing in this blog is meant tobe specific financial advice or a recommendation to buy or sell. I donot give investment advice. Do your own research. Do not rely onanything in this weblog to make investment decisions. I do not log allmy trades here. I only describe or mention those that I think might beinteresting. Consult an investment professional familiar with yourspecific financial situation before buying or selling any security.
The Neubert Experience:
I was trading Mexican equity derivatives in 1994 during the Peso currency crisis, I was trading Brazil (equities, futures and bonds) during many of their currency crises in the 1990's. I was trading emerging market debt in 1992 when the UK Pound broke from the ERM and fell. In every case, where these currencies fell the local stock market indices were up relatively quickly.
Why do do markets go up when currencies fall?
1. Exporters are looking to make more money
2. All assets look cheaper for foreigners relative to their own stock markets so they can buy
3. A falling currency often means good news for pricing power of domestic companies as foreign products (denominated in a foreign currency) go up.
4. In general, a falling currency means inflation for end product prices but not necessarily of product inputs. Inflation, while it may mean higher interest rates, almost always means better pricing power for corporates. (this is a little related to point #3).
So why is the US market down today as the dollar hits recent lows?
Even though Since the 80's Republican governments (Regan and Bush Jr. ) like to borrow and spend like a the Latin American Economic Disaster Governments of the 70's and 80's the US is still not yet treated as a third world country by the rest of the world. But, because the short term reaction is over a short term lack of confidence in the US - foreigners sell stocks and the dollars they used to buy them in the first place. This is a very short term view - and both the market decline and currency decline have both been quite small so far. The market is down Monday because it's is falling under its own weight created by the recent run up. The recent decline in the dollar is just the short term excuse. If the dollar were to really drop, watch out for an increase in the US stock market indices. The US is not suffering from an overall global crisis of confidence. If it was, we'd see long term interest rates skyrocketing - and we are not.
Disclosures and Confessions: I am painfully short US bonds and betting on an increase in long term interest rates. I am long Yen vs. Short USD. I try to diversify my portfolio not just by sector but also by currency and country. I do not believe I (or anyone) should have all their assets in US equities. I also like and own US equities that benefit from a dollar decline. If you've been reading this column for a while you know which equities those are.
Disclaimer: Nothing in this blog is meant tobe specific financial advice or a recommendation to buy or sell. I donot give investment advice. Do your own research. Do not rely onanything in this weblog to make investment decisions. I do not log allmy trades here. I only describe or mention those that I think might beinteresting. Consult an investment professional familiar with yourspecific financial situation before buying or selling any security.
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