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Wednesday July 18, 2007 - 10:41:44 GMT
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Stocks adjusted by the dollar

Key News
• Investors in two troubled Bear Stearns Cos. hedge funds that made big bets on subprime mortgages have been practically wiped out. (WSJ)
• Morgan Stanley economist Qing Wang said it is unlikely that China will allow a one-off revaluation of the yuan this year. "I think in the remainder of the year, we will see continued gradual appreciation of the currency. A one-off revaluation won't help address the problem unless the one-off revaluation is very large [about 20 percent], but I don't think Chinese authorities are prepared to make that bold move," Wang said. (The Standard)
• “The Singapore dollar is also attractive as a funding currency because of its lower volatility, slightly below that of the Taiwan dollar and significantly below that of the Japanese yen,'' Citigroup Inc. economist Chua Hak Bin wrote in a note to clients yesterday. (Bloomberg – Andy Mukherjee)
Key Reports:
7:00a.m. MBA Refinancing Index. Previous: -3%.
8:30a.m. June Consumer Price Index. Expected: +0.1%. Previous: +0.7%.
8:30a.m. June CPI, Ex-Food & Energy. Expected: +0.2%. Previous: +0.1%.
8:30a.m. June Housing Starts. Expected: -1.6%. Previous: -2.1%.


“Politicians can proudly proclaim their gifts to the world, and never worry about the source of funds, nor weigh the gifts against alternate choices. They simply get to give, smile, and sit back to receive the accolades that fall at the feet of the political don. What a life — though a life devoid of reason and reality. We are continually emasculated by DC thugs who steal our dollars and then hand them out as their own, leaving us to distribute whatever change is left in our pockets.”

   Jim Fedako, (

FX Trading – Stocks adjusted by the dollar!

In case you missed it, unlikely unless you’ve been visiting another planet lately, the stock market is on a tear.  The Dow Jones Industrial Average poked its head above the 14,000 barrier yesterday, but settled in for the night just below the rarified mark.  The Dow and companion Transports have once again confirmed (a la Dow Theory), suggesting there is more to go on the upside, no matter the increasing frequency of nosebleeds. 

Thinking about this, and thinking about the dollar as we always do (occupational hazard), we wondered what the Dow Jones Industrial Average would look like if we adjusted it for the fall in the dollar.  So, that’s what we did.  In the chart below it shows the Dow Jones Industrial Average (black line) compared to the Dow Jones Industrial Average Multiplied by the US$ Index (red line); both are a monthly price series.  What we noticed is despite the very nice surge in the unadjusted DJIA, when adjusted for the falling dollar it is still well off its old highs made back in May 2000…hmmm!


Anyone care to offer some conjectures, implications, guesses, or logic…

Our attempts are these:

1) Stocks represent ownership of real assets in the real world.  And said assets (just like gold) should reflect “real purchasing power.”  Thus, a falling dollar means said assets should go higher, all things being equal (ceteris paribus for the economic literati among us).
2) International investors see the Dow as cheap thanks to said dollar demise.
3) The P in P/E (price earnings ratio) is bid higher precisely because the E in the equation is rising thanks to a falling dollar.  The E generated from overseas sales, relative to domestic, tends to rise because of currency translation benefits back into dollars.  When the collective P’s for multinationals (which are a very big part of the Dow) are bid higher, the index follows in kind.

The $14,000 question is: Does the Dow get hammered if the dollar ever stages a rebound? 

Over to you on that one!

Below is the same chart above with our hero, the dollar, overlaid in blue:


You may also notice we added a bit of commentary to this chart--the “launching pad” for stocks.  This we consider to include the emergency Fed Funds rate pushed down to 1%, allowing Mr. Greenspan to save the world from “deflation.”  Plus, the enormous surge in sausage derivatives manufacturing is the second piece of the pad.   

Anyway, if you’re bullish on stocks it’s likely the dollar trend is your friend.  If you’re bearish the news that Bear’s subprime hedge funds are going belly up may make you feel better.   

As they say, choose your poison! 

Jack Crooks
Black Swan Capital

Reader Mail on the next page….

Reader Mail comes to us today from Blackmont Capital, they are located in Montreal.  Interesting insights on the market and a very telling graph besides:

Welcome to Weimar....
  The new US republik is blowing its horn with a new all time high in the Dow.  Unfortunately the CDO's indicies are all crashing.

   These are real losses awaiting the big banks, pension funds & hedge funds. With equity duration at its highest since 1981 any bond market move will have a magnified effect on stocks.

   The Yen has finally broken its downtrend line for the last 6-days and has not weakened as much on this market move up.

   Increasingly the window of deflation is closing and what is facing us amounts to being robbed of our purchasing power.
    Our most recent essay pointed to panic buying as an explanation to this recent market rise. The next graph equally shows participants getting PANIC MARGIN .


Graph Courtesy of Bloomberg.

    The only outcome left is for a buy out bid to take the USA private......

                                          Yves Lamoureux, Investment Strategist, Blackmont

The comments and opinions expressed in this letter are the result of work done by Yves Lamoureux.  They  may differ from the opinion of Blackmont Capital Inc. ("BCI") and should not be considered as representative of BCI, belief, opinion, or recommendations.  The statements and statistics contained herein have been prepared by sources we believe to be reliable but we cannot represent that they are complete and accurate.  This material is published for general information only.  BCI  assumes no liability for financial decisions based on this information.  Readers should obtain professional advice before applying any ideas mentioned to their own personal situation to ensure their individual circumstances have been properly consideredBCI is an independently owned subsidiary of CI Financial Income Fund.  CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX.UN..  Blackmont Capital Inc. is a member of CIPF and IDA .


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