— “Profit Confidential” Column, by Michael Lombardi, CFP, MBA
I’ve written before about how the value of the U.S. dollar against other world currencies affects the price of commodities and the stock market. We saw a perfect example of this earlier this month when the value of the U.S. dollar strengthened and the prices of stocks, precious metals and commodities fell sharply.
Let’s face it…
The financial markets love a cheaper valued U.S. dollar. A cheaper greenback is a positive on so many fronts: the profits of large multi-national corporations are greater when our dollar is cheaper (so the stock market rises); the price of crude oil goes up when the dollar falls, because it takes more dollars to buy that barrel of oil; and the price of gold bullion goes up when the value of our dollar falls, because gold itself becomes a store of wealth.
The “Greece Financial Crisis” of late January and February sent the U.S. dollar soaring against other world currencies, as investors feared other European countries would not come to the rescue of Greece and that the small country might go bankrupt. So the flight to the U.S. dollar began.
But a “strange” thing happened while the crisis over Greece was going on: investors figured out that the U.S. could not pay its obligations either if it was called on to do so.
The U.S. is just as bankrupt as Greece!
I call it a “strange” thing (the realization that the financial debt crisis in Greece is a lot smaller than the debt crisis here in America) because that realization is only common sense and often during times of crisis, common sense evades the market.
The more our dollar falls in value against other world currencies, the cheaper our foreign debt becomes. Not so fair to the foreign investors who bought our debt, but a good deal for America! In fact, we need a cheaper U.S. dollar.
So here we are again…back to more of the same.
With the worry focus off Greece and back on American, the greenback is falling in value again. The stock market is rising; precious metal and commodity prices are rising, too. The price of gold fell from $1,115 per ounce to $1,060 in only three days early in February. My phone was ringing with worried gold investors. Today, gold is back up to where it started February.
My dear reader, for the year ahead, there will be ups and downs on the way, but gold will rise in price with other commodities and the U.S. dollar will continue its decline in value against other world currencies…the latter being something that is in our best interest.
Michael’s Personal Notes:
I spent some time in south Florida this weekend talking to small business owners and real estate people. Many businesses and individuals in Florida are financially hanging on by a thread. The real estate market is still pathetic, with the commercial property market following the route of the residential market in terms of declining prices.
I was in the lobby of a residential building when a process server came in to serve papers to a condominium owner whose bank was putting him in foreclosure. It looks like the only business booming in Florida is that of the process servers.
But something that really struck me on this trip was the lack of ingenuity on the part of the small business owners I met with. They are too depressed to come up with ideas on how they can get their businesses going again. It’s almost as if they have given up.
Where the Market Stands:
The stock market is getting close to breakeven for 2010. As I write this morning, the Dow Jones Industrial Average is down 1.5% for the year. So much for all those investors who jumped ship in late January and early February, as it looked like the rally from March 2009 was over — worse for the speculators who jumped in to short
I have continued with my conviction that the bear market rally that started last March has more leg left to it and that opinion remains unchanged.
What He Said:
“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure — these are the bank stocks I wouldn’t own.” Michael Lombardi, PROFIT CONFIDENTIAL May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks
was down 65%.