Near-Term Equity Performance Will Likely Be Dollar Driven

If you've been following my writing or podcasts lately you will know that I have been on the wrong side of the trade for the last couple months.  However, just so you know that most times my points have been valid, I was on the right side of the market the prior year, and avoided the disastrous declines of 2008. 

The market closed at a new high for 2009 today on the major three US indexes; the Dow, S&P, and NASDAQ.  Is this a function of an improved economy?  Is it because home sales have improved for the months over the summer?  Was it the successful "Cash for Clunkers" program that has jump started our manufacturing base?  No, I say to all of the above. 

The stock market has rallied, along with gold, silver, oil, and foreign markets in concert with the rapid decline of the US dollar.  The inverse relationship between the dollar and our markets continues.  Since July 8^th the S&P 500 is up almost 18% while the US dollar has declined 4%.  The dollar has sunk to a new low for the year, while the stock market has ramped up to a new high for 2009.  I feel that rather than celebrating the fact that our markets, foreign markets, and commodities are going up due to the relative decline in the global reserve currency, we should be fearful that over time we may lose more of our purchasing power as we become poorer as a nation.  A strong economy does not stay strong by devaluing their currency.  Yet that is exactly what is going on.

The economy is not getting better. It is just getting worse at a less rapid pace.  When you closely examine the recent home sales numbers, almost 30% of the purchases have come from subsidized buyers getting the soon to expire, $8000 tax credit.  Over 25% of the purchases have been made by folks using the "new and improved" FHA loans which have required only a 3% down payment.  To think that we have learned our lesson of no money down loans would be a mistake.  It has been reported that the FHA may soon need a government bailout of their own.   All the home sale improvement has come during the seasonally best time of the year, the summer months.

The employment statistics are even more of a farce.  Last week the jobs numbers showed another 216,000 people lost their jobs in the prior month.  The market has been up every day since.  Does it mean that since the jobs lost were better than the 225,000 economist were predicting - that things are improving?  A lot more people just lost their source of income.  Overlooked in last week's report was the fact that for each of the prior two months, jobs lost were revised down by 50,000 per month.  So technically the jobs report actually showed a net 91,000 more jobs lost than previously anticipated. 

Another glaring statistic is that for every 6 souls in the unemployment line there is only one job available.  There has been no increase in demand for temporary workers which is always a precursor to an improved job picture.  As a matter of fact quite the opposite is occurring.   As of today, even temporary jobs are becoming more scarce.

If the dollar can ever muster up a rally - look for the markets to start to decline.  If the dollar continues to decline, we as Americans are going to have much bigger problems to deal with down the road.  But heck, at least temporarily our portfolios will look better.  We better be careful what we wish for.