Highlights for Wednesday, 18 November 2015
Currencies have been the center of international economic discussions since the first coins were used by Lydians in 700BC.
The globalization of trade made possible by coins was suppose to eliminate poverty across the world by 2020 or alternatively be blamed for income inequality. Today, we accuse China and other Pacific countries of creating labor related income inequality in the developed world. These countries produce products with an “unfair” advantage and we label it as biased, desiring a “level” playing. It is interesting how the view changes depending on where you are sitting over time. In the 16th century American gold miners brought gold to the market at such low prices it reduced the value of the metal in Europe by 66%. The reason Americans were able to price gold so low was cheep labor. At the time, I am sure the Financial Times was reporting that American mines were taking advantage of the miners and flooding the market with too much of the precious metal creating an unfair advantage and destroying the English metals market.
The discussion has been the same for decades, if not centuries, on how relative exchange rates impact prices for goods and services resulting in changes in profits. This results in movement within the stock market as both domestic and global companies buy and sell raw materials and end products. Many experts speak with authority on how exchange rates or the strength or weakness of the home currency will spell success or failure; always blaming the other side.
Depending on which side of the fence you sit, a strong currency can create success or failure. Many argue that a strong currency will make selling exports difficult and thereby result in a slower local economy. Others argue a strong currency is the only way to prevent potentially ruinous inflation.
In the end, does it really matter?
This chart shows how the US$ has compared with movements in the U.S. stock market. The blue line represents a trade weighted basket of major currencies from around the world relative to the U.S. dollar. The red line represents the U.S. stock market. If the argument that a weak dollar helps the economy and a strong dollar slows the economy was true, you would see periods of a rising market when the dollar weakened and a declining market when the dollar strengthened. The beginnings of this relationship that lasted a decade can be seen between 1985 and 1995. The currency weakened, and the market increased throughout the time period. This certainly occurred again between the Spring of 2003 and the Fall of 2007 when the dollar moved down and the market moved up. The re-verse occurred between Fall 2007 and Spring 2009. The pattern was repeated again between Spring 2009 and Summer 2011. It must be true; or is it?
Then strange things started to happen. In the Spring of 1995 the currency strengthened and the market kept right in lock step moving higher. It kept this pace up for nearly five years when the dollar dropped and surprisingly so did the market. That wasn’t suppose to happen.
Normalcy returned between 2008 and 2011 when the dollar and markets dramatically returned to moving in the opposite direction. More recently, since 2011 the relationship appears to be have entered another period of stress. The currency has continued to move upward while the market has also moved upward. Briefly, in the Spring of 2015 the market dropped when currencies rose, but it only lasted six months. It appears the market is back to moving with currencies, rather than against them, continuing the trend that began in the Summer of 2011.
An investor must be careful when trying to decipher the absolutes that are sometimes expounded by experts. A strong currency will destroy market growth; a weak currency will drain the market. Which is true? Both, neither? Be careful when listening to declarations that certain things will occur in the market de-pending on currencies, it just might surprise everyone.
The market experienced a rather active week with values moving from near 17,863 down to 17,200 and now returning to 17,483 only 380 points, a 2% difference in the end. We remain near fair value at 97.1%FV with two sectors holding on to fair or above valuations. Industrials (XLI) remained above FV at 100.6% and Information Technology (XLK) stayed just above FV at 102.1% FV.
Consumer Staples (XLP) has retreated slightly to 99.1% FV. Utilities (XLU) moved a bit more than Staples reaching 97.3% which was a bit of a recovery from an earlier lower value.
The Fast Mover UP group saw some nice activity with several undervalued stocks such as Keurig Green Mountain (GMCR) which is only 46.7% FV and has a long way to reach fair value. Two retailers, Macy’s (M) and Nordstrom’s (JWN) also saw some nice upward movement taking the 5th and 8th positions with fair values of 62.3% and 67.5%, respectively. This is a direct result of analysts concerns over the strength of the Christmas selling frenzy.
SanDisk (SNDK) experienced a sizable increase in value with the buyout offer from Western Digital (WDC). The announcement advanced the stock price to $74.84/share which is 117.9%FV. The announcement moved the stock from 384 to 486, just 14 spots away from being THE most highly valued stock in the S&P 500® Index. AS early as July of this year, SanDisk was in the middle of the pack at 299. The offer by Western Digital brought instant market value recognition to the stock with a recognition of future value. Unfortunately, Western Digital’s offer may be a bit heavy of the fu-ture value that it will bring to the party.
Mylan NV (MYL) is on the Fast Mover DOWN list at #3. The stock has moved from an overvalued position in April 2015 as the result of a long climb upward that started in 2008. The current price reflects an increased level of volatility created from the merger mania amongst pharm establishments. Mylan was recently rejected by Perrigo which may have created the recent wild swings ranging from $72/share to $42/share in just three months. That is a fairly uncomfortable ride for such a large enterprise. Trading volume in the stock has increased significantly since 2007 many times doubling and tripling the normal level.
Mylan (MYL) stock price for 5 years with Fair Value Range. (Source: TradingView)