Here I Stand

Here I Stand

Friday, October 15, 2010

The Dow is back at 11K... Is this good news?

These last couple of weeks the Dow Jones Industrial Average, and the market in general, have improved quite a bit, as much as 7-8% in some areas, but is all this bullish activity really a good sign of an improving economy? Some pundits out there – even some respected ones – say “no” and who am I to argue? Well, I'm me, and I say... “Maybe”

The main argument against the idea that an improving market is bringing the US economy out of recession has to do with the rapid increase in the deflation of the US Dollar in the past few weeks. Just yesterday CNBC correspondent Erin Burnett said that the S&P 500 and the value of the US Dollar – two data streams that usually have a positive correlation are running against each other. The S&P has been up 8% in the past few weeks, while in the same time frame, the value of the US Dollar has dropped 7%. some argue that the weakened dollar is one of the driving forces in US stocks being traded – that foreign investors can get a good deal hedging their investments due to the exchange rate. This is, of course, true, but I doubt that the one caused (or causes) the other. Yes, savvy investors always look for favorable exchange rates in foreign markets to get the most out of their investments, but when they start to invest foreign capital into the American market, it still benefits our production, and our overall economic situation, until the exchange rate evens back out.

A devalued US Dollar will not last long, and the increase in capital to our market that we are experiencing at the moment, whether caused by the lower value of the dollar or not, will keep showing returns far after the dollar has leveled off and begun to increase in value.

Another safety net in place is the idea that some of our major economical competitors like China and India may be overvalued – like what happened with Japan just a few months ago. The massive deflation of the Yen caused a huge drop in the Japanese market, and then an influx of foreign investment. Japan is, of course, still recovering from this drop, but it is on the road to digging itself out of that hole. Many experts believe that China is soon going to be forced to do a similar devaluation to the Yuan, and the Indian Rupee might be in the same situation.

The current situation with the value of the US dollar may not seem favorable for emerging market investment, and if the future holds a deflation for China and India, then investors would be wise to stay away from there as well. All the same, UBS investments is very favorable to emerging markets, and relies heavily on these investments to make their returns. South Korea and Malaysia have been given as examples of undervalued and producing nations that could see significant economic growth in the future. I personally like Latin American markets for their agriculture and bio-fuel / green energy potential, and Brazil is at the top of my list.

Overall, the dramatic increase in the market these last few weeks is restrained somewhat by the devaluation of the dollar, but not to the point where the two cancel out. If anything I see both activities as facilitators for US Economic growth. I plan to keep investing, hedging my American companies and funds with the emerging markets that I have been a fan of for a while. 11,000 in the Dow is milestone, but in my opinion, by no means a plateau.

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