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Wednesday April 18, 2007 - 03:46:01 GMT
Black Swan Capital - www.blackswantrading.com

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Decoupling extraordinaire!

Key News
• The New Zealand dollar rose to the strongest in 22 years after a report showed inflation was almost twice the pace the central bank predicted, boosting the prospect of higher interest rates. (Bloomberg)
• 10-year bond yields- US in 3rd place…
Tuesday, April 17, 2007
Coupon
(%) Country Maturity Yield (%) Latest Spread
Over Treasurys* Previous
Yield (%)
6.000 Australia 10 5.968 127.8 5.963
3.750 France 10 4.228 -46.2 4.248
3.750 Germany 10 4.179 -51.1 4.204
1.700 Japan 10 1.700 -299.0 1.705
8.750 U.K. 10 5.084 39.4 5.075
4.625 U.S. 10 4.690 ... 4.737
*in basis points
Source: Reuters and WSJ

• Key Reports Due (WSJ):
7:00a.m. MBA Refinancing Index. Previous: -4.0%.

Quotable
“Some weasel took the cork out of my lunch.”

W.C. Fields

FX Trading – Decoupling extraordinaire!

Is it illogical to suggest the bidding up of stocks expresses a degree of confidence? According to the stock analysts I listen to on occasion, I don’t think it’s an illogical thought. Many seem to view the stock market that way. US stocks are approaching their all-time highs. And that makes a lot of traders and investors happy—and probably has a decent secondary “wealth effect” to help US homeowners think less about the sting of lower housing prices.

Bringing this back to the US dollar, it’s interesting to see such a dichotomy, or decoupling, among major asset classes in the same country—both of which are supposed to express some degree of confidence in said country. The divergence between US stocks and the US dollar is striking. We know there is no reliable correlation between stocks and currencies—but this is getting ridiculous…take a look at the week chart comparing the two below:

CHART


It’s always interesting to us to listen to people tell us how much they hate the dollar, but love US stocks. We do understand the earnings translation thing, helping multi-national company earnings, but to be so confident on one side of the US fence and so negative on the other still has us confused. It’s just one of many things to add to the growing list of things that confuse us on a regular basis.

Okay, what is this “major” decoupling telling us? For one, it is telling us relative to the value of the dollar, based on the US dollar index, stocks have NEVER been more expensive. We are well into new high valuation territory using this index (S&P 500 Index divided by US$ Index), as you can see in the chart below:

CHART



It leads to another question of course; are stocks too high or is the dollar index too low? Or are both a bit out of whack?

Not sure this little exercise helped at all. But it may shed some light on the fact that two major US asset classes are viewed with completely different lenses. And over time, there’s a good chance that may change.


Jack Crooks

 

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