World Markets Clearly Like a Stronger Dollar

By Chip Hanlon | July 24, 2008 | 8:38 AM | 1 Comment

In a meeting last week in New York, an executive with one of the world's largest financial firms asked me my view on the U.S. Dollar and whether it needed to keep declning for foreign stocks to continue to perform.

While acknowledging that foreign currency strength usually aids U.S. investors' international market returns, this year such strength hasn't been enough to blunt the sell-offs overseas. While many economies are showing early signs of the long-awaited "decoupling" fundamentally, stock markets have not-- world markets trade up and down in harmony like never before.

So, I answered that I thought it had become pretty clear we're in a different moment, that a little U.S. dollar strength would actually help global markets enough to offset any foreign currency weakness since they're currently struggling under the fear that if the dollar falls off a cliff, their economies will, too, as our consumer goes completely into the tank. That's not an unreasonable way for markets to be trading.

The Greenback is by no means out of the woods yet, so I just hope the Fed is taking notice: markets around the world-- including ours, of course-- have loved the last few days of dollar strength. Consider giving it more with a few rate hikes, Ben.

Tom Lydon Interview

If you haven't already, check out my interview with Tom Lydon on this week's Market Neutral. Not only is Tom the well-known editor of ETFtrends.com, but his new book on the topic, iMoney, just hit shelves (greenfaucet does not share revenues from Amazon-linked book sales via its site).

Global Reits

At the beginning of my podcast this week which is linked to in the section above, I also touch on the global REIT market. Although the sector overall has already corrected a great deal, I still worry that there's one shoe to drop in the ongoing global credit market unwinding (which is now fully a year old, by the way!): commercial real estate.

One possible exception: Asia. Throughout the region, fundamentals remain strong and vacancy rates remain extremely low, suggesting a sustainability of cash flows and shareholder distributions.

Perhaps most interesting to those with a little extra courage might be Australia, where changes to REITs' financial structures and payout practices have made that sector a slaughter house over the last year (click here for a good recent summary of the Aussie REIT market).

By now you've probably read about New Zealand's interest rate cut, and there is plenty of speculation that Australia will soon join the party. While that would help this sector, it may not be necessary; most Aussie REITs are trading below their NAVs and while this group has woken up and bounced big in recent days, that may only be the start for a group that got shot but now operates on a much sounder fundamental basis due to recent changes to industry accounting practices.

long term great point. in the long term the U.S. and the globe needs a strong US dollar. However, any draining of liquidity from the banks at this time would cause serious short term damage to the housing market and the economy. We need to suffer that short term recession and deflation of asset values, but make no mistake, in the long term it will be necessary for our economic stability. if you think raising rates to fight inflation will be painless, look at the equity indexes of those countries who are currently following that path. Submitted by Michael Pento on Thu, 2008/07/24 - 12:29pm » reply |