 US Stocks in
Euros
Adam Hamilton
Archives
February 11, 2005
Since Washington launched its invasion of Iraq in March 2003,
the US stock markets have generally been performing strongly
in varying stages of a cyclical
bull I call the war rally. Not surprisingly, this recent
strength is the primary driver of the dazzlingly bullish sentiment
prevailing in the markets today.
Yet, initial perceptions can
often be deceiving. On the surface the markets may feel strong,
especially if one just considers the cyclical-bull-to-date gains
since March 2003 or the occasional market-darling success stories
like Google. Digging a little deeper, however, soon dispels much
of the basis for the unbridled optimism of the perma-bulls.
The behind-the-scenes decay
stealthily eroding the very visible bullish foundation of the
war rally is primarily advancing on two fronts. I discussed the
first about a month ago, the fact that the war rally probably
peaked in early 2004, which was a crystal-clear downtrending
bearish year prior to the anomalous
election rally of recent months. Almost all of 2004's
gains happened in November and December, barely salvaging an
ugly year.
In addition to the election
rally that won't be repeated for four more years and the extraordinarily
dangerous complacency that it spawned, there is a second internal
threat to the war rally. It surrounds the rapidly depreciating
international purchasing power of the US dollar. Whether you
are an American investor or live outside the States, this is
an extremely important issue to consider.
With subscribers and consulting
clients in 49 countries now, I am blessed with countless opportunities
to discuss the ongoing US
dollar bear with investors from all over the world. In my
experience, investors living outside the States understand its
implications all too well and think about if often. Sadly though,
my fellow American countrymen often seem largely oblivious to
the insidious erosion of our fiat currency.
All American investors today
have grown up since World War II, in a peculiar era where the
US dollar utterly dominated global commerce. As such,
it is really hard for us Americans to think in terms outside
of the mental dollar box we are locked in from childhood. Thinking
in multiple currencies is challenging for Americans, but nevertheless
this important skill can certainly be learned.
Since the war rally erupted
in March 2003, the US dollar has fallen rather dramatically,
21% in US Dollar Index terms. Thus a given pile of dollars saved
over the past two years is worth a frightening 1/5th less in
terms of what it can actually buy on the global markets. Thanks
to the Fed's monumentally negligent mismanagement of the US dollar,
it is rapidly inflating
away into oblivion.
Unfortunately most Americans
don't perceive this huge loss in dollar purchasing power, primarily
for one big reason. I suspect that the majority of Americans
buy most of their necessities from giant discounters like WalMart.
The giant discounters help keep their prices low by sourcing
their goods largely from China, which has a decade-old artificial
peg with the US dollar.
Thanks to this Chinese 'dollar
standard' near 8.3 yuan to the dollar, the yuan is insulated
from dollar weakness. Chinese exporters love this, as the yuan
being shackled to the falling dollar ensures that American consumers
will be paying the same number of nominal dollars for Chinese
stuff regardless of currency trends. Indeed the lower the dollar
goes, dragging down the pegged yuan, the more China can export
into the States as its competition like Europe with free-floating
currencies is priced out of the US markets.
I suspect that without the
yuan/dollar peg, the falling dollar would have led to higher
wholesale prices of goods for major discounters and hence higher
prices for American consumers. And even the most economically
naive American would certainly notice a huge 21% increase in
the cost of everything we use in such an extremely short two-year
time span.
This ongoing secular dollar
bear is even more important in stock-market terms. We Americans
look at the US markets and assume that a dollar we invested two
years ago is worth the same as a dollar today. That is absolutely
not true of course. Today's cheapened US dollars, at best, are
only worth about 4/5ths of the international purchasing power
of an early 2003 US dollar.
The only way we can analyze
this effectively, especially as myopic Americans, is to somehow
render the US stock markets in constant-dollar terms. My favorite
approach to this analytical puzzle is to express the US markets
in euros, the dollar's primary competitor and the fiat currency
most likely to achieve global dominance as the dollar's international
value continues to relentlessly erode.
Our charts this week express
the Big Three US stock indices in euros. They reveal how the
US markets look to a European investor who sold euros to buy
dollars to buy US stocks just after the initial violent spike
up as the war rally launched in March 2003. Not surprisingly,
the picture painted of constant-dollar US markets is not pretty
and shows just how anemic the US stock markets' true performance
has been in international purchasing-power terms.
In all of these charts, the
original US stock indices, the ones we Americans watch everyday
in the headlines, are rendered in red. The blue lines, as well
as the white, yellow, and black technical tools, correspond to
the US markets as they look to a European investor after adjusting
for the weakening dollar exchange rates. After fully accounting
for the massive dollar losses, the war rally's bravado deflates
considerably.
As usual, the hyper-speculative
NASDAQ witnessed the greatest war rally gains. For reasons that
continue to utterly elude me, even after the wicked bubble and
crash the lessons
from the NASDAQ bust have already been largely forgotten.
Speculators, and even investors, continue to madly chase stocks
with bubble valuations and minuscule profits compared to their
market capitalizations. Obviously they haven't felt enough pain
yet to learn the folly of buying
high, but history says they almost certainly will.
All the gains numbers in these
charts run from the respective war-rally lows in the lower left
corner. Prior to the election rally, the NASDAQ was up 69% in
early 2004 before grinding relentlessly lower in a very clear
bearish downtrend. The election rally breakout catapulted the
index back up to squeak out a slightly higher rally-to-date gain
of 71% in late December. From a euro perspective, however, the
NASDAQ's gains were much less impressive.
The war rally in the NASDAQ
only went 41% higher in constant-dollar terms, and today it is
only up 33% in the last two years from the perspective of foreign
investors. In fact since mid-2003, the NASDAQ has actually been
grinding sideways, with zero gains, if the rapidly deteriorating
dollar purchasing power is considered. While the red nominal
NASDAQ line may excite some, the blue constant-dollar NASDAQ
line steals most of the war rally's thunder.
Why is this the case? Because
foreign investors have to buy dollars before buying US stocks
and sell dollars after selling US stocks in order to make a round-trip
trade in their own local currency. Thus exchange rates are a
crucial component of final realized gains. A real-world example
helps make sense of it all.
Imagine a European investor
back in March 2003, seeing the dazzling first week of the war
rally and deciding to invest €10,000 in the US markets
to ride the growing wave of bulldom. In order to actually buy
US stocks though, the European first has to sell his euros for
US dollars. I doubt many US brokers accept euros directly!
On March 21st, 2003, €10,000
would have been worth $10,522. Since he can't play the US markets
directly with euros, our European investor would have traded
them for dollars and purchased US stocks. But, since any foreign
transaction is a two-staged trade, he could not fully realize
his profits in the US markets until he sold his US stocks for
dollars and then sold the dollars to repatriate his capital back
into euros.
From March 21st, 2003 until
this past week, February 8th, the NASDAQ was up a rather impressive
47%. So our European investor's €10,000 stake grew from
$10,522 to $15,449. But the moment he decides to repatriate his
gains back into euros, the dollar's secular bear looms up and
mauls away a great portion of his dollar gains. On February 8th,
it took $1.2763 to buy one euro, far more than the $1.0522 on
March 21st, 2003.
So when the European's $15,449
US equity position is sold for dollars which are then used to
buy euros, the European investor only ends up with €12,105,
or a 21% gain over the period. This gain, which would be even
lower after all the transaction costs are considered, is vastly
inferior to the 47% that American investors achieved in wasting
dollars over the same period. It reveals the true nature of the
war rally, which was not very impressive in constant-dollar terms.
The war rally's real gains
really ended in late summer 2003, and since then the US markets
priced in other currencies have just been grinding relentlessly
sideways. All gains beyond NASDAQ 1800 have been nothing but
an illusion fostered by the plummeting US dollar. The contrast
between the blue NASDAQ euro line and the red usual NASDAQ line
is very striking and quite profound.
This international purchasing-power
perspective is very important because the reason everyone ultimately
invests is to increase their future purchasing power.
A 20% investment gain is useless, for example, if one needs 30%
more dollars to buy the same standard of living by the end of
the investment period. Americans have to understand that they
have not done as well as they think since March 2003 because
the dollar's international value is plunging.
Fascinatingly, this constant-dollar
view of the US markets illuminates the true nature of the election
rally as well. As you can see above, the election breakout from
the 2004 downtrend resistance line that happened in the headline
US indices was not mimicked by a breakout in the NASDAQ
in euros. Almost the entire election rally in late 2004 was directly
offset by a plummeting US dollar. While Americans rejoiced over
the election rally, foreign investors watched the constant-dollar
markets continue to grind right on lower.
This really intrigues me because
it was well known that most foreigners were hugely opposed to
Washington's imperialism and did not want the incumbent president
to win in November. After the incumbent did win, foreign investors
put their money where their mouths were and sold the dollar hard
in anticipation of more years of Washington imperialism. The
dollar fell so fast that it completely erased the election
rally in constant-dollar terms!
Thus, when the dollar's bear
rally and rapidly eroding international purchasing power is considered,
the war rally loses a great deal of its luster. Not only is this
constant-dollar view of the market utterly flat since NASDAQ
1800 in mid-2003, but it reveals the false nature of the election
rally and the continuing bearish trend in the most speculative
of US markets.
And since the NASDAQ was the
best performer of the flagship US indices since March 2003, the
mighty S&P 500 and the elite Dow 30 are bound to look even
worse in constant-dollar terms. Through the eyes of European
investors, the US markets have not earned any gains since
the late summer of 2003. This is not an encouraging sign for
the American bulls' desperate dream of a newly emerging stock
superbull.
The S&P 500, widely considered
to be the best proxy for the US markets in general by professional
money managers worldwide, has languished flat in constant-dollar
terms since mid-2003. Neither the second stage of the war rally
in late 2003 nor the late 2004 election rally ever really happened
if the erosion of international dollar purchasing power is considered.
In order to see our own markets
through the world's eyes, imagine that the blue S&P 500 euro
line is what we have seen in the States in the past couple years.
The war rally started strong, running from just above 800 to
nearly 1000 in less than six months. But after that, the S&P
500 has oscillated relentlessly between 900 and 1000 like a dying
fish flopping on land, failing to break decisively above this
crucial level after five tries. If you bought near 1000 in mid-2003,
you would actually be down slightly today about 18 months
later.
Can you imagine the devastating
psychological impact to American investors if the markets had
just been flat for 18 months in a row? How bullish would even
Wall Street and CNBC be if the S&P 500 just could not manage
to get over 1000 after a year and a half of valiantly trying?
My guess is not very bullish at all. This bearish perspective
would radically change today's hyper bullish sentiment.
Foreign investors, who have
to buy and sell dollars to invest in the States, are seeing a
vastly different perspective on the US markets than us Americans.
Just as the blue trading range above would not excite you or
I one bit, neither is it endearing to foreign investors who have
watched the US markets flatline in their local currency terms.
The ironic part of this whole
depreciating dollar mess is it is not the foreign investors who
are being deceived, but we Americans. Much of our gains in the
stock markets in recent years have been directly offset by a
precipitous loss of international purchasing power in our fiat
currency. We may have more dollars, but they are worth a lot
less in the world except in temporary artificial dollar-peg cases
like China.
This final chart is the worst
of the lot. The Dow 30 is composed of the best of the best of
elite US companies, and this index is often considered to be
a bellwether for the American markets and economy as a whole.
If some of the greatest industrial corporations on the planet
can't make real headway in the past couple years, it certainly
doesn't bode well for the US markets as a whole.
Unlike the NASDAQ euro and
S&P 500 euro that are essentially grinding sideways, the
venerable Dow 30 is actually in a very distinctive downtrend
in constant currency terms! It challenged 9250 in mid-2003 but
has since fallen all the way back to 8000 before the election
rally erupted. Even that was only good enough to briefly carry
it above 8500, although the index is once again challenging 9000
today thanks to the dollar's latest bear
rally.
Once again, the dollar bear
obliterated any ethereal election rally gains that ensued and
there was no breakout from the Dow's relentless grinding downtrend.
In constant-dollar terms the Dow 30 is carving a massive multi-year
top, not a foundation for a huge new bull market. Foreign investors
understand this well, and American investors can only ignore
it at their own great peril.
The war rally was indeed spectacular
for its initial six months off of its March 2003 bottoms. But
in the past 18 months or so, US stocks have done absolutely nothing
when considered in international purchasing power terms. All
nominal gains have been offset by direct losses in the amount
of goods and services that a dollar can buy around the world.
And all the rallying in late 2003 and late 2004 was a total charade
in real terms.
If you are an American, you
need to realize that all is not as it seems in our stock markets.
The headline indices may look good, but the purchasing power
of our savings and investments is swirling down the toilet thanks
to the Federal Reserve and the abomination of a fully-fiat dollar
backed by absolutely nothing. Today's dollar is not a constant
like our gold-backed dollar of a century ago, but it is a rapidly
depreciating target that must be considered in any long-term
investment decisions.
If you live outside the States,
think carefully of what the ongoing dollar bear will do to your
overall US gains before you actually deploy capital in the US
markets. If the dollar bear continues dragging US fiat down at
a similar rate to recent
years, then you are going to need stellar gains indeed to
offset dollar losses. If you can't ultimately earn profits in
your local currency via US investing, then there is no reason
to invest in the US. Look to markets where you can earn strong
real returns even after currency fluctuations.
And if you are interested in
more innovative analysis like this that you simply cannot find
in mainstream sources, please consider subscribing to our acclaimed
Zeal Intelligence
monthly newsletter. We originally
predicted and have monitored the entire dollar bear, and
are striving to launch investments and speculations that will
gain in all currencies despite the dollar weakness.
In the current issue recently
published, I technically analyzed all of the elite gold stocks
in preparation for the next expected gold upleg. While gold has
languished in euro
terms, gold stocks' enormous triple-digit gains have been
very large in all currencies, not just the US dollar. In addition
to preparing for a major gold-stock redeployment at appropriate
technical signals, we are also layering in shorts on the increasingly
precarious US equity markets. Please
join us today!
The bottom line is not all
is as it seems in the US stock markets today. Yes, the war rally's
gains were impressive initially, but since mid-2003 in constant-dollar
terms the real advance of US equities has stalled. Any gains
have been largely offset by chronic weakness in the dollar. It
is foolish to ignore this insidious erosion of purchasing power
whether you are American or not.
One way to keep abreast of
the real state of the US markets in international purchasing-power
terms is to view them through the lens of another major currency
like the euro. We will certainly continue to periodically monitor
this unique perspective going forward.
Adam Hamilton, CPA
February 11, 2005
So how can you profit from this information? We publish
an acclaimed monthly newsletter, Zeal
Intelligence, that details exactly what we are doing in terms
of actual stock and options trading based on all the lessons
we have learned in our market research. Please consider joining
us each month for tactical trading details and more in our premium
Zeal Intelligence service at www.zealllc.com/subscribe.htm
Questions for Adam? I would
be more than happy to address them through my private consulting
business. Please visit www.zealllc.com/financial.htm
for more information.
Thoughts, comments, or flames?
Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load,
I regret that I am not able to respond to comments personally.
I will read all messages though and really appreciate your feedback!
 Copyright ©2000-2005 Zeal Research
All Rights Reserved (www.ZealLLC.com)
321gold Inc
|
