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Being bearish on the dollar and short U.S. equities is inconsistent & is proving to be a losing trade

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October 12, 2009 – Comments (22) | RELATED TICKERS: UDN , USD

I see a lot of people out there (at least on CAPS) who are bearish on the U.S. dollar, yet they are short all sorts of stuff. Being almost universally short U.S. stocks in your CAPS portfolio and bearish on the dollar at the same time seems inconsistent to me at best.

The recent weakness in the greenback has actually pushed the S&P 500 to its most affordible level ever relative to other markets. According to a this Bloomberg article:

The S&P 500 is priced at 19.9 times earnings, the biggest discount to the MSCI World Index of 23 developed countries since May 2003, according to monthly data compiled by Bloomberg. For Europe-based money managers, currency translations push the average cost for a dollar of U.S. profits down to 13.6 euros, the lowest level ever relative to global equities and a discount that investors in America have never enjoyed, data compiled by Bloomberg show.

Overseas investors that hold almost $2.5 trillion in U.S. equities are getting a bigger slice of corporate America with each euro, yen and pound they spend just as S&P 500 companies from PepsiCo Inc. to General Electric Co. post higher overseas sales. While more losses in the dollar would cut returns, the last time U.S. stocks were this inexpensive, in 2003, the S&P 500 began a four-year, 62 percent advance.

One can argue about how quickly the value of the dollar will continue to fall, or whether it even will continue to do so at all.  There are many dollar bulls out there who make reasonable arguments to support their cases.  I personally believe that we will see the U.S. dollar continue to gradually lose value in an orderly manner over time. 

If one expects the recent dollar weakness to stick, or for it to continue to weaken it doesn't make sense for them to be short U.S. equities as well.

Rallying S&P 500 Never Cheaper in Europe on Dollar

Deej

22 Comments – Post Your Own

#1) On October 12, 2009 at 11:43 AM, alstry (35.42) wrote:

Deej....

The banks are cutting off credit....revenues are evaporating to consumers, business and government........and all a leveraged to the gills....especially the government.

Who gives a hoot what the dollar is if the nation is bankrupt?  Who wants to invest in a bankrupt nation..until the nation has restructured...

Where do you expect the revenues to come from.....the bankrupt citizens, the bankrupt businesses, or the bankrupt government????

90% of our GDP is our own consumption......it is not the end of the world....just a restructuring.

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#2) On October 12, 2009 at 11:44 AM, ChrisGraley (29.68) wrote:

I don't know about anybody else, but I've been hedging by shorting stocks that I think will do poorly no matter what market we are in. Remember that in CAPS they just have to underperform the market as a whole. Since the market as a whole should be rising at a steady pace during inflation, it should be a good bet.

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#3) On October 12, 2009 at 12:26 PM, kaskoosek (58.06) wrote:

Deej

Only a fool would disagree with you.

 

Alstry is in Kookoo land, unless there is an implosion of the monetary system or some kind of war which I doubt stocks will keep on increasing in nominal terms.

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#4) On October 12, 2009 at 12:39 PM, portefeuille (99.60) wrote:

-------------------------

#4) On October 12, 2009 at 7:00 AM, portefeuille (99.99) wrote:

DAX price index (the "usual" DAX is the DAX performance index)

S&P 500 index in EUR.

(notice that the DAX performance index has more than doubled since its 2003 low (it is currently at ca. 3500), whereas the S&P 500 index in EUR is still below its 2003 low. quite an underperformance ...)

-------------------------

(from here

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#5) On October 12, 2009 at 12:49 PM, russiangambit (29.27) wrote:

portefuille, assuming you are bearish on dollar what would you do at this point if you have Euros 1) buy European equities with Euros ( x% potential return)  or 2) Exchange Euros for Dollars and buy US equities with them. ( y%  (US equities) - z% (dollar)) potential return.

Here is my take:

The answer depends on whether y-z is greate than x? Do you think it will be. I thinik not, if we are assuming real dollar slide here due to money printing.  So, if you chose x, and keep Euros, then you fruther jeopardize the future of the dollar, since you are not buying it, and your assets are not flowing into US equities o it is bad for them too.

 In that case, it is entirely possible to be bearish on both the US dollar and US equities at the same time if you measure against an outside metric like Euro or a basket of currencies vs. measuring US equities against USDs.

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#6) On October 12, 2009 at 12:52 PM, portefeuille (99.60) wrote:

The S&P 500 is priced at 19.9 times earnings, the biggest discount to the MSCI World Index of 23 developed countries since May 2003, according to monthly data compiled by Bloomberg. For Europe-based money managers, currency translations push the average cost for a dollar of U.S. profits down to 13.6 euros, ...

When the P/E is 19.9 then "a dollar of profit costs 19.9 dollars" and "a euro of profit costs 19.9 euro". It is nice to see that the author knows how to divide 19.1 by 1.46, but I can only hope he knows that you cannot simply produce undervalued companies by "using different currencies" for numerator and denominator. I think I know what he means. I hope he means what I think he means ...

 

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#7) On October 12, 2009 at 12:54 PM, portefeuille (99.60) wrote:

In that case, it is entirely possible to be bearish on both the US dollar and US equities at the same time if you measure against an outside metric like Euro or a basket of currencies vs. measuring US equities against USDs.

I completely agree.

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#8) On October 12, 2009 at 12:58 PM, alstry (35.42) wrote:

What does a PE of a 140 buy?????

It is obvious the author does not have a strong background in owning a business......

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#9) On October 12, 2009 at 12:58 PM, portefeuille (99.60) wrote:

I would not shift euros into into U.S. equities if I were convinced the dollar would keep falling "steeply". I don't think the advantages (for exporters to Euroland for example) would "outweigh" the losses incurred via the currency exchanges.

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#10) On October 12, 2009 at 12:59 PM, portefeuille (99.60) wrote:

into into

into

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#11) On October 12, 2009 at 1:01 PM, portefeuille (99.60) wrote:

notice that the DAX performance index

notice that the DAX price index

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#12) On October 12, 2009 at 1:02 PM, PdoBear (< 20) wrote:

There is only so much dollar destruction Ben can do in a single year. Doesn't anyone really think the rate of dollar decline will continue at the 2009 pace? 

In mid-to-late 2010, we'd see $200 a barrel oil with 10%+ unemployment while the rest of the world would only be paying the equivalent of $100 a barrel. Shortly after the nationwide riots, Bernanke would be asked if he would prefer a blindfold or not.

 

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#13) On October 12, 2009 at 1:05 PM, portefeuille (99.60) wrote:

... while the rest of the world would only be paying the equivalent of $100 a barrel.

No, everyone would pay the equivalent of $200. Otherwise it would not be the equivalent.

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#14) On October 12, 2009 at 1:14 PM, russiangambit (29.27) wrote:

> In mid-to-late 2010, we'd see $200 a barrel oil with 10%+ unemployment while the rest of the world would only be paying the equivalent of $100 a barrel. Shortly after the nationwide riots, Bernanke would be asked if he would prefer a blindfold or not.

Ha. That is what I think too. Bernanke's hand will be forced sooner or later. He knows that too and his only hope that it is later ( i.e. when real economy reaches some sort of equilibrium). But later might become too late (in case economy is not stable when it happens) and the whole thing might spiral out of control. That is why I personally hope for sooner, but I am not getting my wish so far.

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#15) On October 12, 2009 at 1:24 PM, PdoBear (< 20) wrote:

I apologize Portefeuille. You are correct, my sentence structure was poor. Nevertheless, I'm sure you get the point.

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#16) On October 12, 2009 at 1:37 PM, StopLaughing (< 20) wrote:

Bernanke is not going to rock the boat until after his is thru his confirmation hearings. He is not confirmed yet.

After he is confiirmed he will be free to adopt the policies he wants. That may be raising interest rates and supporting the $. It may not. 

The inverse relationship between the $ and the market will not always hold. It will reverse at some time. Until then I think the $ is the major driver of the market. 

I am not particularly worried about the $ unless it crashes thru the Bush 2008 lows. The $ already seems to be strengthening against the Yen. Gold and perhaps the market is more focused on the Euro/$ ratio. 

A recovering Europe is not bad for the US with a weak (not collapsed) $. The plan is to inflate a little while using the weak $ to hitch an export ride on the other faster recovering economies in the world. I have little faith in Japan but Europe and the rest can pull the US along for a year or so. 

 

 

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#17) On October 12, 2009 at 1:50 PM, ChrisGraley (29.68) wrote:

My dog's discarded chew toys are strengthening against the Yen #16)

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#18) On October 12, 2009 at 2:12 PM, Tastylunch (29.28) wrote:

I dunno Deej, I don't think German Equities did real well during the Weimar republic if memory serves.

I think it largely depends on the speed and size of the currency decline...

I don't think this is a yes/no kind of relationship.

if it does continue to fall orderly as you posit than yeah Equities should continue to do well  relative to other classes.

anyway I agree with russiangambit and Porte that's not a pure 100% correlated situation.

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#19) On October 12, 2009 at 2:41 PM, binve (< 20) wrote:

TMFDeej,

For the short term (recent few months) you are absolutely correct. Over the long term, the historical record disagrees with you.

.

From: http://marketthoughtsandanalysis.blogspot.com/2009/09/thoughts-on-us-dollar-analysis-of-usdx.html.

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#20) On October 12, 2009 at 3:00 PM, whereaminow (20.75) wrote:

Well you seem to have hit the nail on the head as to why the deflationist camp was doomed in the short run.  Right now, the holders of wealth would put their money into just about anything, even ChrisGraley's dog's discarded chew toys, before they held dollars.

David in Qatar

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#21) On October 14, 2009 at 12:38 PM, breizhoneg (< 20) wrote:

I agree with your comment about how the weaker dollar plays and the inconsistentcies in the market.  In fact, it seems to methat there are other inconsistencies at play and that something somewhere’s got to give. . . . . After all:

Gold is in the stratosphere;
Rates are in the tank,
And yet the Dow is doing fine!
One wonders whom to thank. . . .

All three together cannot last:  
If gold is up, then rates should rise;
The Dow should leak like a punctured sieve.
It's really very clear you see that
Something soon has got to give.

The dollar’s down, the dollar’s out!
We’re spending bucks we haven’t got.
One day the Chinese may decide
To commit dollar suicide.
What will put the game in play?
Iran? Defaults? more Fannie Mae?   

But cash is king until that day
If one expects  to really live
And hopefully retire one day --
 ‘Cause something, somewhere’s got to give

Something somewhere’ got to give. . . ..

 

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#22) On October 26, 2009 at 10:27 PM, streetflame (30.08) wrote:

I agree with binve.  And as 1. the US dollar weakens and is used less as a reserve currency and 2. the credit markets find a new partial equilibrium, positive correlation is the pattern we will see more and more often.

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