Insights & Advice

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Stocks fly as dollar falls

On the surface, Americans might think that a weakening dollar means that there is something going wrong with our country. Quite the contrary, a declining greenback could actually help the economy recover sooner than hoped, and the stock market knows this.

Today, 40% of pre-tax profits of companies listed on the S&P 500 Index come from overseas. So a falling dollar helps a U.S. company’s bottom line by making the prices of their exported goods and services cheaper to buyers abroad. More exports mean more profits, which means more production here and hopefully additional jobs. At the same time, if we export more and import less (a weak dollar makes imported goods more costly to us) then over time the huge trade imbalances we have with countries like China and Japan become well, more balanced.

Although all indications point to the beginning of a recovery here at home, most economists believe it will be a slow recovery with unemployment first rising to 10% before the end of the year and then easing to 6% but no sooner than 2013. That prognosis will likely cause a backlash among unemployed voters who see their American Dream fading quickly from their grasp. The White House must be painfully aware of this threat as we enter a mid-term election year in 2010. As a result, I expect the Obama Administration in their public statements to continue to support “a strong dollar” policy while doing nothing to support the greenback as long as its decline helps lift the economy into recovery.

Of course there is a limit to how low the dollar can fall before our trading partners (and debt holders) throw a tantrum. But I’m betting the U.S. Treasury will simply listen sympathetically to (or ignore) what is sure to be a rising tide of heated rhetoric from those most dependent on a strong dollar for their economic well-being. Only when our economy appears to be gathering momentum, or if the dollar’s decline ignites the potential for inflation, will our government act to stem the dollar’s fall. I don’t think that will happen this year.

So what are the consequences of the dollar’s descent? We are already experiencing some of them. The markets are moving higher based on the expectations that many companies will benefit from export profits. Since commodities are priced in dollars, as the dollar declines so do the prices of oil, gold, silver, cooper, wheat and dozens of other basic materials and food. To compensate for this loss, commodity prices must rise and thus gold is now selling for over $1,000/ounce while oil is over $70/barrel.

You may have read earlier in the week (if you read “The Independent”, a U.K. newspaper), that there is a plan afoot by several oil producing countries in league with China, Japan and other countries to replace the greenbacks role in energy markets with a basket of currencies including gold. Although several nations quickly denied the report, commodity prices surged nonetheless.

Recently, I talked to my old friend John Roque, Managing Director and Technical Analyst at WJB Capital Group. Back on September 4th, in my column “Gold takes Center Stage as Markets Waffle”, John had indicated gold was going higher (back then it was still $1,000/OZ.). I recall at the time, I received several comments from readers debunking that forecast and gold as an investment vehicle. Gold is now $50/ounce higher and John has raised his target price to $1,300/ounce. He also believes oil can hit $90/bbl., silver $21/ounce while the dollar, he believes, will continue to decline to at least the March, 2008 lows, and I agree.

For those who might want to hear more of John Roque’s insights (and missed my radio show), you can listen to my interview with him on www.Berkshiremm.com where you can hear it via podcasting over the next few weeks (just click on the radio interviews link in the lower right hand corner of the home page).

We are now beginning third quarter’s earnings season. Alcoa, the giant aluminum producer, surprised the Street this week with better than expected earnings. The markets gained over a percent the next day. If economists’ predictions are right, we should see the economy bounce back substantially (3.1% GDP gowth) in this just ended third quarter so earnings should also be somewhat robust, at least in some sectors. Investors, however, are nervously waiting for the battered financial sector to report over the next few weeks.

On next Friday’s Vox Radio show “@theMarket with Bill Schmick”, I interview Anton Schutz, Portfolio Manager of the Burnham Financial Industries Fund (symbol: BURFX), His fund ranked in the top 2% of all U.S. equity funds for this year, according to data complied by Bloomberg.. He is expecting “mixed results” from the banking sector, but tune in to my show next week or read my column for more of his insight.

Posted in A Few Dollars More, At the Market